On June 2, 2014, U.S. EPA released its Clean Power Plan Proposal to address carbon dioxide (CO2) emissions from existing power plants. EPA continues to move forward with climate change initiatives as gridlock in Congress persists over the issue. EPA's strategy has been to target transportation and the power sector, the two largest sources of greenhouse gas emissions.

The Clean Power Plan is an interesting mix of federal regulation while attempting to provide maximum flexibility to the states to achieve emission reductions. EPA would require a 30% reduction in CO2 emission from existing power plants from 2005 levels by 2030.

However, rather than establishing specific emission limits for each plant, the regulation would establish "goals" for each state to achieve by 2030. The goals were established by examining each state's current carbon output and the potential to reduce those emissions.

Formula for Arriving at Goals

EPA has authority under Section 111(d) of the Clean Air Act (CAA) to regulate and set emission standards (42 U.S.C. Section 7411(d)). Under Section 111(d), EPA must determine the "best system of emission reduction" (BSER) for existing sources. EPA then must apply the system to determine the level of emission reductions required (referred to as "emission guidelines").

State's are then tasked with developing their own plans to meet the emission guidelines. This is where the flexibility comes in. Rather than specifying each plant must meet a specific emission limit, EPA is allowing the state's to choose from a variety of options on how to achieve their emission guidelines (i.e. "goals").

EPA provide four general approach to achieving the reductions and refers to those approaches as "building blocks." These include:

Reducing the carbon intensity at individual power plants through heat rate improvements;

Reducing emissions from the plants that produce the most CO2 emissions by using those sources less frequently;

Implementing demand-side energy efficiency programs that reduce the amount of generation needed in the state.

In its proposal, EPA takes the four building blocks and applies them to each individual state through a seven step process. This formula generates a state-specific CO2 emission performance goal which is measured in average pounds of CO2 per net megawatt hour from all sources in the state.

After determining the amount of reductions needed in each state, EPA then defers to each state to develop its plan for achieving the emission reduction goals. States can use any component of EPA's four building blocks or even develop an entirely different methodology for achieving its state goal.

States are also given the option to utilizing either a rate-based or mass-based emission reduction goal. Under a rate-based approach, emission reductions are determined by comparing the rate of CO2 emission per unit of electricity output (expressed in emissions per megawatt hour). To establish a rate-based emission limit in the power sector, EPA has traditionally looked at the difference between coal-fired units and natural gas units.

Under a mass-based approach, the emission reduction is based upon a quantity of reduction from an established baseline. For example, 30% reduction of the state's total power plant C02 emissions from 2005 baseline.

After Congress failed to pass national cap-and-trade legislation in President Obama's first term, the option is back on the table. State's can develop an in-state only program or join with other states, such as has already been done by the Western States and Eastern States (RGGI). Cap-and-trade, while criticized, has proven to be the most cost effective means of achieving emission reductions.

State's even have flexibility when it comes to compliance deadlines. While initially states will be required by 2016 to create a plan that will include some emission reductions, states can qualify for extensions of 1 or 2 years.

No matter when plans are submitted, states will have to achieve interim goals for reductions between 2020-2029, then meet the state final goal no later than 2030. By providing for this flexibility, the states can choose when to accelerate their emission reductions.

In commenting on the flexibility provided states under the rule, the New York Times reported:

“I’ve never seen anything like this, where states get this much flexibility. It’s astounding,” said Dallas Burtraw, an expert on electricity markets with Resources for the Future, a Washington research group. “The E.P.A. is signaling maximal deference to the states.”

Criticism of the Proposal

Too Strong

Those criticizing the proposal, concentrated on the costs of achieving the proposed reductions. Business groups, utilities and Midwest states were harshly critical of the proposal. Opposition is probably best summed up by Indiana Governor Pence who was quoted in the New York Times as stating:

“These proposed regulations will be devastating for Hoosier workers and families,” Mr. Pence said. “They will cost us in higher electricity rates, in lost jobs, and in lost business growth due to a lack of affordable, reliable electricity. Indiana will oppose these regulations using every means available.”

Too Weak

EPA had been criticized for utilizing 2005 as a baseline. As noted in Bloomberg, half of the emission reductions required have already been met without even a single new regulation being adopted.

Criticism also is directed at the overall emission reductions required under the proposal. Some think the cost of compliance has dropped dramatically in recent years. As noted Harvard Business Review- the cost of renewable have come way down; states have already implemented regional cap-and-trade programs; and natural gas has displaced coal as the fuel of choice.

Comment Period

EPA will accept comments for 120 days after the proposed rule is published in the Federal Register. Due to the sweeping nature of the proposal, EPA will, no doubt, be inundated with comments.

It is an issue that just won't go away...Our incredibly hot summer seems to have re-focused attention on doing something regarding climate change.

James E. Hansen, director of NASA's Goddard Institute for Space Studies, in Friday's Washington Post, announced the release of a new study. The title of Mr. Hansen's op-ed piece shows what the new study concludes- Climate Change is Here---and Worse than
We Thought:

In a new analysis of the past six decades of global temperatures, which will be published Monday, my colleagues and I have revealed a stunning increase in the frequency of extremely hot summers, with deeply troubling ramifications for not only our future but also for our present.

This is not a climate model or a prediction but actual observations of weather events and temperatures that have happened. Our analysis shows that it is no longer enough to say that global warming will increase the likelihood of extreme weather and to repeat the caveat that no individual weather event can be directly linked to climate change. To the contrary, our analysis shows that, for the extreme hot weather of the recent past, there is virtually no explanation other than climate change.

Thousands of fish are dying in the Midwest as the hot, dry summer dries up rivers and causes water temperatures to climb in some spots to nearly 100 degrees.

About 40,000 shovelnose sturgeon were killed in Iowa last week as water temperatures reached 97 degrees.....The fish are victims of one of the driest and warmest summers in history. The federal U.S. Drought Monitor shows nearly two-thirds of the lower 48 states are experiencing some form of drought, and the Department of Agriculture has declared more than half of the nation's counties — nearly 1,600 in 32 states — as natural disaster areas. More than 3,000 heat records were broken over the last month.

With new media reports of the impact of the heat wave and new studies emerging confirming the impact of climate change conservatives have started to see its an issue that they need to get ahead of rather than simply resist.

Conservative groups have held meetings this summer to talk about pushing for a carbon tax to replace other taxes while addressing climate change. A recent CNN article discusses how the proposal to put a tax on certain fossil fuels in gaining support amount some Republicans- Carbon Tax Gets Unusual Support:

We have to have a system where all forms of energy bear their full costs," President Reagan's former Secretary of State George Shultz said in a recent interview with Stanford University News. Shultz now heads a task force at Stanford that is currently studying the feasibility of a carbon tax.

For Shultz there are many reasons to support such a tax. One is making fossil fuel energy sources absorb costs that are currently borne out by society at large, such as through higher health insurance premiums or Medicare bills caused by pollution-induced diseases.

He also cites energy independence, as well as global warming, "which is not a matter of opinion, but a matter of fact," he said. "The arctic is melting. A lot of people seem to be scoffing at the idea of global warming, but reality will catch up with them."

The old saying is that elections go the way of the economy. Perhaps the debate over climate change regulation goes the way of the weather.

Political ads still try and cast support for cap and trade as a negative for those politicians that supported the proposal in Congress. However, as long as media headlines are filed with the dramatic impacts of this years hot summer, it will become much more difficult for politicians to cast support for doing something on climate change as a negative. Perhaps that is why conservative groups are trying to get ahead of the curve by exploring policy options that they see as more palatable.

Let's say Romney wins the election. Do you see President Romney, with the current "hot weather" news cycle, repealing all of the EPA climate change regulations without some sort of new policy initiative like a carbon tax? That just seems far less likely.

The AP is reporting that the Republican controlled House is expected to introduce legislation shortly that will strip all authority from U.S. EPA to regulate greenhouse gases (GHGs) under its existing authority in the Clean Air Act. This would specifically target the EPA's endangerment finding and could possibly go as far as saying GHGs are not a "pollutant" under the Clean Air Act.

The soon introduced legislation will be very aggressive according to a recent AP article:

Officials said the House bill, which was to be offered Wednesday, would nullify all of the steps the EPA has taken to date on the issue, including a finding that greenhouse gases endanger public health.

In addition, it seeks to strip the agency of its authority to use the law in any future attempts to crack down on the emissions from factories, utilities and other stationary sources.

The House bill joins similar efforts in the Senate:

Republicans are attempting similar restrictions in the Senate, where the political situation is more complicated. Sen. John Barrasso of Wyoming has introduced a more sweeping measure than the one House Republicans are drafting. At the same time, Sen. Jay Rockefeller, D-W.Va., has proposed a two-year moratorium on EPA attempts to regulate greenhouse gases, a plan that already has attracted a handful of Democratic supporters.

“What has been said from the White House is that the president’s advisers would advise him to veto any legislation that passed that would take away EPA’s greenhouse gas authority,” Jackson told reporters on Capitol Hill. “Nothing has changed.”

Many see the President's proposal of a national renewable energy standard as a switch in strategy now that cap and trade is dead. While there was no mention of climate change in the President's speech, the renewable standard is seen as, perhaps, less distasteful means of reducing GHGs. More importantly, it has some possibility of getting a few Republicans on board.

Perhaps a bill implementing a renewable energy standard offers a mechanism in which the Administration would find palatable a reduction or prohibition on EPA's GHG regulatory authority. Before dismissing the President's plan, similar to the tax deal, Republicans should see what they could get as part of a broader compromise. Because without compromise, EPA will continue to issue GHG regulations through 2012.

With prospects dead for federal cap and trade climate change legislation, the focus for market mechanisms to reduce greenhouse gas (GHG) emissions shifts to the states. Meanwhile, as discussed in my last post, EPA is left moving forward with its command and control regulations to reduce GHGs under the Clean Air Act.

After the defeat of Proposition 23, California's climate change programs are moving forward including cap and trade which is planned to start in 2012. California is in talks to link their carbon trading market with New Mexico, British Columbia, Ontario and Quebec. There is even a possibility of linking the market to the 10 Northeast states already operating a trading program for power plants- RGGI.

Now an interesting concept is being proposed that would allow states using market mechanisms to reduce GHGs to be exempt from EPA's command and control regulations. The following appeared in article in Reuters,

U.S. states with cap-and-trade laws want the Obama administration to add their carbon markets into new federal greenhouse-gas regulations, a California environmental official said.

State-run carbon-trading programs should be "treated as equivalents or substitutes" for Environmental Protection Agency regulations for emissions tied to global warming from power plants, oil refineries and factories, Mary Nichols, Chairman of the California Air Resources Board, said yesterday in a telephone interview.

This is an interesting proposition. Would EPA allow state cap and trade programs to replace regulations under the Clean Air Act such as New Source Review (NSR) or New Source Performance Standards (NSPS)?

It may set up an interesting dynamic where states that have adopted market mechanisms for reducing GHG emissions are put at an advantage to states subject to the myriad of EPA command and control regulations. While cap and trade has recently received a very bad name, putting these two regulatory approaches side-by-side may breathe new life into cap and trade as a more business friendly means of reducing GHG emissions.

While the political and policy focus is clearly on the Country's struggling economy, caught within that debate is U.S. policy on climate change. As the economy continued to languish this summer, any hope of a cap and trade bill emerging from Congress died.

The bill was a victim of a Congress that created a Christmas tree of regulation out of a basic market-based concept. In the end the bill was labeled "cap and tax." And who raises taxes during the middle of a recession?

In fact, who passes any major piece of environmental legislation during a bad economy? While I don't subscribe to all the viewpoints of the organization, a fascinating chart featured in an article by Daniel Weiss appearing on the Center for American Progress website paints a vivid historical picture that ties the state of the economy to the prospects for passage of major environmental legislation.

This from the article:

"The first Clean Air Act, Clean Water Act, Endangered Species Act, and Resource Conservation and Recovery Act (hazardous waste disposal) were all enacted when unemployment was 6 percent or lower. Unemployment is 50 percent higher now. Only four major environmental laws were enacted with annual unemployment over 7 percent, and none with unemployment greater than 7.5 percent. Unemployment averaged 9.3 percent in 2009 and 9.7 through September 2010."

Coupling the CBO forecast with the historical track record on passing environmental legislation, climate change legislation may not have a serious hope of passing until 2014 or later.

With no legislative alternative, EPA will continue move its climate regulatory agenda forward. Environmentalists will continue to push nuisance claims in the courts. Unfortunately, the inefficiencies of "command and control" regulation and litigation will be the U.S. policy on climate change for the foreseeable future.

[Note: The New Yorker's, Ryan Lizza, has an very interesting article on the inside the beltway politics regarding cap and trade legislation. A grand bargain between environmental groups and industry was scuttled by poor timing, unfortunate events and political infighting]

By all accounts, Republicans are set to enjoy major gains in both the House and Senate following midterm elections. Speculation is that the Republicans could likely regain control of the House and could even get close in the Senate.

What implications could this change in the political landscape have for climate change regulation?

We have already seen the Senate scrap all efforts at a cap and trade bill this summer. Based upon Senator Reid's comments that a "piecemeal" approach is on tap, its more than likely cap and trade is off the table for the foreseeable future.

With cap and trade's dim future, all eyes have been shifting toward U.S. EPA promulgation of climate change regulations. EPA has already finalized greenhouse gas standards for vehicles and will require consideration of greenhouse gases from major stationary sources beginning in 2011 (Tailoring Rule).

Congressional Efforts to Stop EPA

With renewed focus on EPA's efforts, Republicans made lead the charge toward blocking EPA's actions through budget maneuvers or by directly blocking the effectiveness of the EPA regulations. (See Reuter's article)

Budget Bill Prohibition- Republicans could include in an appropriations bill a ban on the use of EPA funds to administer climate change regulations.

Block EPA Authority or Delay it- Earlier this year, the Senate debated legislation that would directly block EPA from implementing its rules by undermining its Endangerment finding. Another alternative was floated by Senator Rockefeller- delay EPA's implementation for two years which would take us to the next Presidential Election. There were 47 out of 100 votes in the Senate supporting a delay in implementation of EPA's climate change regulations. Its hard to imagine this issue will not be revisited after the midterm elections.

Effectiveness of an Appropriations Blockage

The utility of a budgetary blockage of EPA's authority to implement the climate change regulations should be seriously questioned. As discussed below, a budget provision prohibiting expenditures doesn't remove the requirements from the books. Industry will still have to comply with the Tailoring Rule even if EPA can't use funds to enforce it.

The regulatory restrictions in appropriations bills that have been enacted during the last 10 years illustrate that Congress can have a substantial effect on agency rulemaking and regulatory activity... These appropriations provisions can prevent an agency from developing a proposed rule, from making a proposed rule final, or from implementing or enforcing a final rule. However...these appropriations provisions cannot nullify an existing regulation (i.e., remove it from the Code of Federal Regulations) or permanently prevent the agency from issuing the same or similar regulations. Therefore, any final rule that has taken effect and been codified in the Code of Federal Regulations will continue to be binding law — even if language in the relevant regulatory agency’s appropriations act prohibits the use of funds to enforce the rule. Regulated entities are still required to adhere to applicable requirements (e.g., installation of pollution control devices, submission of relevant paperwork), even if violations are unlikely to be detected and enforcement actions cannot be taken by federal agencies.

Such an appropriations maneuver could mean businesses must prepare PSD permit applications that address greenhouse gases only to have those permits sit at EPA because it is legally prohibited from paying staff to review them.

Hopefully the real world implications of Congressional efforts to block EPA will be considered. There is no doubt a strong effort will be made after the midterms to block EPA climate change regulations. Without passage of legislation that directly addresses the issue, maybe...just maybe litigation is a better alternative than tricky legislative tactics.

After this summer's anti-climatic end to federal climate change legislation, some thought that perhaps there would be a temporary end of the discussion of climate change regulation. However, recent weather events (wildfires in Russia, floods in Pakistan and an ice sheet breaking off Greenland) and extreme heat have reinvigorated the debate.

Here is some highlights of the recent discussion.

Is Climate Change Causing Wild Weather? - I like the National Journal's discussion of controversial topics. The website features view points from well recognized experts, politicians or interest groups. The current thread discusses the science (or lack thereof) behind linking climate change to this summer's wild weather.

GOP Candidates Knock Climate Change- This article on Politico discusses the number of Republican candidates who are willing to take the stance linking man made emissions to climate change is simply unproven. With the economy possibly heading to a double dip recession, support for a new "tax" on emissions has become a basis for attack this November.

Chamber Sues EPA Over Endangerment Finding- In late July, EPA rejected the Chamber's petition for reconsideration of EPA's Endangerment ruling. The Chamber argued that e-mails released in "climate-gate" justified EPA reconsideration of its finding. EPA said the e-mails were taken out of context and there is no evidence that undermines its finding. This month, the Chamber pushed its legal finding further by filing suit challenging the basis for EPA's finding that greenhouse gases endanger public health and the environment.

EPA Marches Forward with Rule Making- As discussed in my previous post, U.S. EPA is moving forward with regulation of greenhouse gas emission under the Clean Air Act. Beginning in 2011, without passage of any federal legislation, emissions of GHGs from large sources will trigger new requirements.

Concluding Comment- All of this may be a surprise to some of you who thought that the Senate's decision to scuttle federal cap and trade legislative efforts meant the end of the debate. It is clear that this issue will not go away. While direct connection to weather events cannot be made, there is no denying the connection between extreme weather events and re-invigoration of our national debate.

There was a lot of anticipation this summer about the scope of the energy bill coming out of the U.S. Senate. Would the Senate try and tackle climate change? Would it develop a national renewable portfolio standard?

The bill was released yesterday and the answer was "no" on both accounts.

The White House kept a glimmer of hope that climate change provisions- Cap & Trade- could be added back in at a later date. This from Reuters:

But the White House indicated on Tuesday that climate provisions could be added back into a bill once negotiators from the Senate and the House of Representatives hammer out differences between their respective versions during "conference" talks.

The House bill, passed last year, includes climate provisions to cut greenhouse gas emissions.

White House spokesman Robert Gibbs, when asked whether the administration would seek to do a separate climate bill later after getting a narrow energy-focused bill first, said: "No, I think the process is you get an energy bill through the Senate then you can conference that legislation with the House."

Also absent from the bill was a proposed national renewable energy standard (RES) that would have mandated 15% of electric generation from renewable sources. Some Democrats claimed there were 62 votes in favor of an RES. They pointed to the urgency of restoring incentives for construction of renewable energy sources noting wind development dropped 72% in the first half of 2010 compared to last year. This from the N.Y. Times:

Many see an RES as an achievable goal that could spark construction of manufacturing plants for wind turbines and drive the development of clean energy. Several senators, including Mark Udall (D-Colo.) and Byron Dorgan (D-N.D.), said yesterday that support for a modest RES that requires utilities to find 15 percent of their power by 2020 exists in the Senate.

"It seems to me that would be logical to include that [RES] in the energy bill that was going to be brought to the floor," said Dorgan, whose state stands to be a key generator of wind power. "I hope maybe there's a way to be found to do that."

Udall said there are about 62 senators who would support the 15 percent standard.

EPA and States Maintain Center Stage

The prospects for cap & trade and an RES diminish rapidly. It seems hard to imagine the Democrats trying to cram such major provisions through reconciliation. Though it appears that is being left open as an option.

What has become clear is that EPA's greenhouse gas regulations are center stage. EPA's Tailoring Rule will kick in at the end of 2010 on new sources. Mandatory monitoring and reporting already exists for other sources. With legislation seemingly forever stalled in the Senate, pressure will mount on EPA to adopt more climate change regulations.

As to renewable energy standards, the states' have been on center stage for several years. Thirty-seven states have adopted some form of a renewable or alternative energy standard. Some are stronger than others, but there are strong incentives at the state level for development of alternative sources of power.

However, there is inconsistency among the states in defining renewable sources, the % required, and marketability of production credits. A federal bill could have addressed these inconsistencies.

However, the price of addressing those inconsistencies in mandating renewable energy generation in every state, including the Southwest which has resisted the standards. Southern states don't feel there is a much opportunities for renewable energy development.

Like cap & trade, prospects have dimmed for a national RES. Incentives for development will be left primarily to the states.

(For more information on each states specific programs, click on the map above)

U.S. EPA has released its CAIR replacement program called the "Transport Rule." In a previous post I discussed EPA's efforts under the Transport Rule to address the Court's ruling striking down the CAIR rule. After listening to a presentation by EPA, the structure of the Transport Rule is a little clearer.

The major issue identified by the Court was that CAIR failed to ensure that upwind states significant contribution to the air quality issues in downwind states would truly be eliminated. The court ruled that utilities in a state could make no actual reductions, they simply could satisfy their regulatory obligations by purchasing allowances (pollution permits) under the cap and trade program.

After two years of development, EPA has released its proposed Transport Rule and is very confident it can withstand legal challenge. They stated in the presentation that their lawyers are confident the structure of the Transport Rule will meet the Courts mandate by ensuring elimination of "significant contribution."

Here is how the program works. Each state has a firm budget which serves as a state specific cap on emissions. At the end of the trading year, U.S. EPA will review emissions information from each state and see if any exceeded their caps. If a state is below the cap, nothing happens. If the state is above, EPA will embark on a more extensive review to determine which companies within the state were responsible for exceeding the cap.

Companies responsible for exceeding the state cap by failing to actually reduce emissions significantly enough, will be required to turn in extra allowances based upon their pro rata share of the amount the State's cap was exceeded. Perhaps an oversimplified example would help:

Assuming the state of Ohio has only three utilities companies operating in the State. Hypothetically, it has a State budget under the Transport Rule of 90 tons. In 2014, actual emissions in the State (120 tons) exceed its budget by 30 tons.

The slide shows that two companies will be required to surrender extra allowances equivalent to the amount the Ohio exceeded its budget.

Certainly this is far more complicated than the original CAIR rule struck down by the Courts. Let's hope the Transport Rule can withstand legal challenges. Otherwise, States will face a complex mess in trying to meet federal air quality standards. Also, utilities will face tremendous uncertainty preventing them from making long term choices.

Has EPA left a window open for environmental groups who may not like the Transport Rule to successfully challenge the rule? In essence, EPA is penalizing companies who caused the state to exceed its budget (which represents it significant contribution to downwind states).

Will the courts deem this adequate to meeting the Clean Air Act obligation to eliminate actual significant contribution? Or will the courts still maintain the view that the utilities will be able to meet their obligations through purchasing allowances and not by actual reductions? In other words, what is the assurance each state's significant contribution will be actually eliminated?

Originally, the Court planned on throwing out the CAIR rule entirely. However, it was embedded in so many other State air pollution control plans, the Court allowed CAIR to remain in place temporarily while EPA worked to finalize the replacement rule proposed today.

Virtual elimination of the cap and trade mechanism, by assigning each State a firm emission budget which it may not exceed

Accelerating the time frame for reductions to coincide with the attainment deadlines faced by the States

The Transport Rule proposes a hard 2014 deadline for meeting reduction requirements- it appears the ability to bank allowances ("pollution permits") will no longer be permitted. Overall, the rule would reduce power plant emissions of sulfur dioxide (SO2) by 71 percent over 2005 levels and nitrogen oxides (NOx) by 52 percent. SO2 and NOx react in the atmosphere to form fine particle pollution and ground-level ozone (smog).

The agency puts the expected annual cost of compliance to power plant operators at $2.8 billion in 2014. However, elimination of original cap & trade program set forth in CAIR can only mean significantly increased compliance costs. The real benefit of cap & trade is to utilized market mechanisms to achieve more cost effective emission reductions.

State Budgets Based On "Contribution" to Downwind Air Quality Problems

The Court's big issue with CAIR, was EPA inability to ensure that the rule would eliminate each State's contribution to downwind air quality issues. The Court pointed out that all the utilities in any given State, could in theory, meet their compliance obligations by buying allowances and electing not to install pollution controls.

While this is in theory true, that is the point of a cap & trade program designed to utilize cost effective reductions. The power plants that can reduce pollution in the most cost effective manner will aggressively reduce emissions and sell excess reductions to those plants facing higher compliance costs.

A quick skim of the 1,300 page rule suggests the absence of a real market mechanism to achieve reductions. Sure EPA says interstate and intrastate trading can remain under its preferred option. However, States now have imposed hard emission budgets.

Perhaps this will mean limited intrastate trading, but far less interstate trading. With a smaller market to trade allowances, EPA makes it more difficult to leverage cost effective reductions.

Of course, EPA had to address the legal flaws identified by the Court. The real solution was to get better authority from Congress. Otherwise, we are left with a shell of a cap & trade program resulting in higher utility compliance costs (aka as higher utility bills).

EPA will take public comment on the proposal for 60 days after the rule is published in the Federal Register. The agency also will hold public hearings. Dates and locations for the hearings will be announced shortly.

President Obama is convening a meeting tomorrow to explore all possible alternatives that would lead to passage of a climate bill before the midterm elections. The most likely alternative that will receive consideration is a much narrower cap that would only be applied to utilities. Under this approach, the provisions covering large industrial emitters and the transportation sector set forth in Senator Kerry's American Power Act would be cut out. This from Climatewire:

"I think the chances of a comprehensive bill are abysmal," Eileen Claussen, president of the Pew Center on Global Climate Change, said in an interview last week, referring to legislation offered by Sens. John Kerry (D-Mass.) and Joe Lieberman (I-Conn.).

"Do I think there is a chance of something that is narrower for carbon, like the pricing of utilities? I think that's possible," she added. "If all we can get is utilities, it's not bad."

A handful of crucial senators are planning to attend, including Richard Lugar (Ind.), Judd Gregg (N.H.), Susan Collins (Maine) and Lisa Murkowski (Alaska), all Republicans whose support Obama will seek to eventually secure. Democrat Sherrod Brown (Ohio), another undecided senator, will also be there, according to a survey of offices by E&E.

A deal on just utilities looks unlikely. However, it has the best chance of any current proposal. The key will be whether utilities will view this as an opportunity to secure "certainty" with regarding to the greenhouse gas requirements. The ability to establish the regulatory landscape does have major benefits in making big capital investments associated with large scale facilities.

An interesting bargaining chip will be EPA's authority to regulate all sources of greenhouse gases under the Clean Air Act. The Senators attending, especially Murkowski, are highly motivated to block EPA regulatory program. Would the President be willing to foreclose or delay EPA regulations in exchange for a bill?

Last week, two distinct paths clearly emerged for addressing climate change. The first, legislation that would put in place a market mechanism to reduce emission over time- the Kerry-Lieberman Bill. The second, EPA's use of its existing regulatory authority under the Clean Air Act to reduce greenhouse (GHGs) emissions (EPA Tailoring Rule)

EPA Regulation Under the Clean Air Act

One road-regulation under the Clean Air Act-we know very well. We may not be able to see how it exactly will fit with reducing GHGs, but we know all the familiar mechanisms-

New Source Review- slow permitting process for new facilities. An ever evolving mandated technology standard. Poorly designed rules that lack clarity for when NSR is triggered. Lots of litigation.

Title V permits- a program originally designed to make air permitting more easily understood, has led to permits that are hundreds of pages long.

NAAQs and SIPs- It is totally unclear how these mechanisms would fit with climate change. Its issues maybe, by themselves, prompted former Administrator Johnson to comment the Clean Air Act is "ill suited" to regulated GHGs. What we do know about the NAAQS process in relation to climate change is it will require State to utilize complex planning processes to reduce GHG emissions. An inefficient mechanism to achieve your goal of reducing GHGs.

NSPS- ill-defined command and control technology standards for GHG reductions.

Cap and Trade- A Market Mechanism for Reducing Emissions

Kerry-Lieberman (otherwise known as the American Power Act) sets up a sector based cap and trade mechanism. Each sector (power, manufacturing and transportation) has its own cap.

The concept is to set an overall cap for total emission from the sector that is gradually reduced over time. Each regulated unit must have an allowance for each ton of emissions.

The big difference from the command and control approach of EPA regulation is that the market will help drive innovation and reduce emissions. Each allowance will have a price associated with it. If projects that reduce emission can generate reductions cheaper than that price, project developers will make money by selling the credits to the regulated entities who need the allowances.

Right now there is a tremendous amount of hesitancy to move forward with the cap and trade approach. A myriad of issues are used as reasons for not supporting the proposal:

The financial metldown- has led to disdain for Wall Street, many are unwilling to support a "trading" proposal that will allow big banks and investment companies to participate in the process.

Europe's cap-and-trade has experience major issues. Fraud with credit generation. A verification system that is seen as cumbersome and ineffective. A cap that is accused of "leaking."

BP Oil Spill- the President tried a horse trade- he would support off-shore drilling in exchange for passage of an energy bill. After the spill, this horse trade no longer works. What compromises are left that could move the legislation forward.

Embarking on the "Well Traveled Road"

Most give the Kerry-Lieberman Bill almost zero chance of passing this year. Many are calling it a "discussion draft" that will be used as a starting point next year when the legislation is revisited.

With little chance of passage in the next year and possibly beyond, we default to the "well traveled road" of EPA regulation. Those who think its likely Congressional amendments introduced to block EPA from exercising its authority have a chance of passing, are placing their faith in a false hope. There will never be enough support to pass this type of amendment.

With no Legislative relief, we are left with EPA regulations. Its really time to start understanding the regulatory approach that has been unveiled and identify the pitfalls. The largest pitfall is EPA belief it has legal authority to phase in NSR regulation by raising the triggers for federal air permits. We will watch how this plays out, but a disaster could truly ensue if EPA's Tailoring Rule is struck down.

As we move forward, we hopefully will revisit Legislation because it truly offers the best solution. Just as Robert Frost wrote, the road less traveled can make all the difference.

Somewhere ages and ages hence:
Two roads diverged in a wood, and I—
I took the one less traveled by,
And that has made all the difference. Robert Frost

Last week, Senator Voinovich drew attention and criticism for proposing a significant expansion of the preemption language in the forthcoming bi-partisan climate bill to be introduced by Senators Kerry, Lieberman and Graham. Failure to carefully consider the preemption language and possible additional limits on other regulatory authority would be short-sighted.

One of the main reasons for Congress to pass climate legislation would be to remove the morass of uncertainty and mounting litigation in relation to climate change regulation. If the bill has narrowly drawn preemption language, the certainty the businesses need will simply be non-existent.

The whole point of climate legislation should be to develop a national strategy to address the issue. A narrow preemption would mean creation of new regulatory authority that just adds to the current chaos surrounding climate regulation.

Here is a quick summary of what Senator Voinovich is proposing as reported in the New York Times :

Voinovich is circulating a proposal (pdf) that would go beyond Clean Air Act pre-emptions to block the federal government from regulating greenhouse gas emissions under laws including the Endangered Species Act, the Clean Water Act and the National Environmental Policy Act. The amendment would fully prohibit states from regulating greenhouse gases based on their effects on climate change and would prohibit public nuisance litigation related to climate change.

Notably, Voinovich's measure would also prevent EPA from moving forward with its part of a joint rulemaking finalized this month with the Transportation Department. The rules seek to raise the fuel economy of the nation's passenger fleet while imposing the first-ever greenhouse gas standards on cars and trucks.

EPA's Tailoring Rule is perhaps the best example of vague climate change regulatory authority. EPA admits that regulation of CO2 like any other pollutant would lead to absurd results. The Tailoring Rule is meant to phase in regulation of CO2. However, no one knows whether EPA has the authority to phase-in those regulations. Is that something we really want to leave to chance?

Even if Senator Kerry's bill uses a phased in approach, the bill should explicitly pre-empt nuisance lawsuits. Expensive litigation that often leads to inconsistent Court rulings is no way to develop a common sense regulatory policy.

Regional and State Regulations

If the bi-partisan bill fails to pre-empt State and regional climate change regulations we will be left with a patchwork regulatory scheme across the country. Avoiding such a patchwork regulatory scheme was one of the major reasons the Obama Administration decided to push the compromise on vehicle emission standards. Otherwise, California and other states would have established separate vehicle standards only applicable in their states.

Conclusion

With the bills anticipated narrower focus, expansive preemption may be much more difficult. It is anticipated that the bi-partisan bill will start with limits on the utility sector and possibly phase in other sectors of the economy over time. If a bill passes, what remains as legal authority becomes even more important if the bill has a narrow focus.

Environmental groups will be looking to press for action in all areas where authority would remain. The logical argument for Congressional action is to remove the uncertainty and develop a national regulatory approach to addressing climate change. This can only be accomplished if the focus is on the bill as THE approach, not just one new regulation to add to the existing patchwork of regulations.

The President called together key Senators and members of his cabinet in hopes of re-invigorating stalled discussions in the Senate over climate change legislation. This summer the House of Representatives passed a bill that would require greenhouse gas reductions of 17 percent by 2020 compared with 2005 levels. Since legislative debate moved to the Senate, a viable bill has yet to emerge.

Senators Kerry, Lieberman and Graham have been attempting to hammer together a compromise that they feel could garner the 60 votes needed in the Senate. At yesterday's meeting Senator Kerry stated he expects a bill to emerge from their discussions by the end of the month.

The poll notes the highest skepticism is among Republicans. However, there is has been a general trend upward.

The poll results come after months of mounting criticism of the United Nations climate science panel's findings regarding the likelihood of climate change. Fact checks revealed some of the more drastic impacts claimed in the UN's report appear to have been exaggerated by the authors. This from the Times:

The latest criticism of the IPCC comes a week after reports in The Sunday Times forced it to retract claims in its benchmark 2007 report that the Himalayan glaciers would be largely melted by 2035. It turned out that the bogus claim had been lifted from a news report published in 1999 by New Scientist magazine.

Turns out the more likely date for melting the glaciers is a few hundred years away. Just yesterday the UN announced it would perform an independent review of the the study in the face of mounting criticism. This from the U.K. Guardian.

In an announcement at the UN in New York Ban Ki-moon, the UN secretary general, and Rajendra Pachauri, the much-criticised head of the Intergovernmental Panel on Climate Change, said the InterAcademy Council, which represents 15 national academies of science, would conduct the independent review.

The announcement follows months of controversy which, while not altering the scientific consensus on climate change, has given fresh ammunition to opponents of action on global warming.

The latest polling and issues at the UN form the backdrop to efforts to pass climate legislation and their influence should not be under appreciated. Some Senators are pushing for dropping cap and trade entirely from the bill leaving a national mandate on renewable energy. The President has commented he is not in favor of this approach and still believes a price on carbon is the way to go.

Senator Kerry made comments that the proposed bill to appear at the end of the month will look much different than anything which has been revealed to date. Most likely it will be much narrower in scope than the House passed bill. It may take a sector approach versus the much broader cap proposed in the House bill. Emissions from the utility sector could be the only regulated pollutants.

Regardless, with criticism mounting on the key UN report and public opinion showing reduced support, it will be tough to pass any climate legislation. At the same time, it appears the bills designed to prohibit the EPA from moving forward with greenhouse gas regulations under existing Clean Air Act authority are for show only.

Best guess is that all this political maneuvering will leave us with EPA regulations beginning this month and no climate legislation in 2010. Word to the wise...we will be revisiting this approach down the line.

The twists and turns in the saga of regulation greenhouse gases (GHGs) continue. After the State of the Union and release of the President's budget, there is speculation that President Obama has abandoned Cap & Trade legislation.

Meanwhile, businesses face greater risk as a result of new and impending regulatory action. The Securities and Exchange Commission (SEC) has issued guidance telling companies they must disclosure risks to investors related to the company's exposure to effects of climate change and potential regulations. Finally, EPA is moving ahead with its plans to regulate GHGs using existing authority under the Clean Air Act.

Is Cap & Trade Dead or Alive?

The President only made vague references in the State of the Union to a "comprehensive energy legislation" that will include measures to address climate change. Speculation was that the Obama Administration had made the decision to drop its plans for Cap & Trade. The speculation increased with the release of the proposed federal budget, which dropped $646 billion in anticipated revenue from Cap & Trade. The President only included a "placeholder" for that revenue.

Carol Browner, the President's Climate Adviser, pushed back on the notion Cap & Trade is dead. This from Politico:

The top White House climate adviser pushed back against reports that a climate bill would be scaled back — but shied away from giving an exact time frame for when the Senate should take up the legislation.

“I think predictions about when something is going to happen in the legislative process are very, very hard to make you have to just continue working at it,” Carol Browner told an audience assembled for a climate and energy forum. “We’re encouraged by what we are seeing, and we’re going to continue working at it.”

In hopes of keeping a bi-partisan compromise alive in the Senate, the President put more nuclear power on the table in State of the Union. There is also discussion of a scaled back Cap & Trade proposal that would be limited only to utilities.

Even with a scaled back proposal or other compromises, I see it very hard to get to 60 votes in the Senate. Which makes the next update the critical issue.

EPA Rulemaking

While some businesses think the reduced prospects of a Cap & Trade bill means they have escaped potential climate change regulation, they may have a major wake up call this March. EPA is planning on moving forward with a series of regulations that will have dramatic impacts on businesses that emit CO2 and other greenhouse gases.

EPA has finalized its "Endangerment Finding." This paves the way for the Agency's release of the Light Duty Vehicle Rule which will establish GHG emission standards for vehicles. As previously discussed in prior posts, finalization of mandatory emission limits for vehicles raises GHGs to "regulated pollutant" status under the Clean Air Act.

Once GHGs are considered "regulated pollutants", other provisions of the Clean Air Act are automatically triggered, most notably Title V permitting and New Source Review (NSR). EPA is proposing to finalize its "tailoring rule" simultaneously with the Light Duty Vehicle Rule in order to substantially raise the thresholds for triggering Title V permits or NSR.

The likelihood of regulations was further evidenced by the President's proposed budget, which includes significant increase funding to pay for new EPA regulatory initiatives on climate change. (Summary of EPA proposed budget)

$47 million more the EPA in the 2011 budget to pay for greenhouse gas regulation

$4 million would go to the EPA's mandatory greenhouse gas reporting rule. Major emitters of greenhouse gases must start tracking their emissions this year under EPA's reporting rule.

$25 million to States to aid in processing new permits that will be required as a result of greenhouse gases becoming a regulated pollutant under the Clean Air Act.

$7 million is allocated to development of new performance standards including determining what constitutes Best Available Control Technology (BACT) for greenhouse gases.

SEC Interpretative Guidance

On January 27th, the SEC voted to issuance guidance requiring companies to disclose certain risks associated with climate change. The 3-2 vote was highly controversial.

While some saw the SEC action as an political endorsement of climate change regulation, others believe its the job of the SEC to require disclosure of business risks. The NY Times, in an editorial, supported increased information on corporate risk associated with climate change-"The S.E.C. action is simply one more incentive for investors and managers to better understand the risks — and the opportunities — out there for publicly traded businesses. "

From the press release, here is a description of the requirements in the forthcoming guidance:

Impact of Legislation and Regulation: When assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding climate change is material. In certain circumstances, a company should also evaluate the potential impact of pending legislation and regulation related to this topic.

Impact of International Accords: A company should consider, and disclose when material, the risks or effects on its business of international accords and treaties relating to climate change.

Indirect Consequences of Regulation or Business Trends: Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies. For instance, a company may face decreased demand for goods that produce significant greenhouse gas emissions or increased demand for goods that result in lower emissions than competing products. As such, a company should consider, for disclosure purposes, the actual or potential indirect consequences it may face due to climate change related regulatory or business trends.

Physical Impacts of Climate Change: Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business.

While the prospects for Cap &Trade legislation have dimmed dramatically over the last few months, this is by no means the end of the story. Significant new mandatory regulations will be finalized as early as March.

While there are issues with the House version of the Cap & Trade bill, it would at least create a market mechanism for reducing emissions. Business opposing Cap & Trade may soon learn that the alternative- regulation under the Clean Air Act- is a far worse proposition.

I was giving a speech to a trade association last night regarding Cap and Trade legislation in Congress. The sentiment of most participants in this manufacturing group was that they had dodged a major bullet because passage of a bill looks very unlikely. While that is true, I told the audience don't lose sight of the fact regulations are coming even without a bill in Congress. This took many of the members by surprise.

Here is how the battle over climate change regulation is currently unfolding...

While the Senate continues to try and reach a compromise over Cap and Trade legislation that could garner 60 votes, most observers are now saying passage is very unlikely. A range of reasons are cited for the diminishing chances for a Senate bill:

Loss of the "super" majority with the Massachusetts Senate race- although 60 Democrats were not going to vote for this bill, it is one less vote. This from Reuters:

From a purely numerical perspective, the Massachusetts election makes only a marginal difference. With the real division running through the centre of the Democratic Party, rather than between the parties, cap-and-trade was never going to pass on a 60-40 party-line vote. It was always going to need at least some Republican votes. So the loss of one Democrat makes only a small difference.

"Climategate"- the uncovering of unflattering e-mails by climatologists

Pick any combination of the items above and a strong case can be made that cap and trade will not emerge in 2010 or in the near future. A recent New York Times Article does a great job describing how the battle has shifted from Congress to the halls of U.S. EPA.

EPA in March is expected to roll out the first-ever federal standards affecting greenhouse gas emissions from automobile tailpipes. This follows the agency's move in December declaring greenhouse gases a danger to public health. The tailpipe standards would automatically trigger requirements that stationary sources -- such as power plants -- install "best available control technology," or BACT, according to EPA. The agency has proposed a separate rule to shield smaller facilities from those requirements, the "tailoring rule," which is also expected to be in place by March.

As set forth above, the dominoes are falling leading to full blown regulation of greenhouse gases using EPA's existing authority under the Clean Air Act. The regulations have progressed as follows:

Endagerment Finding- EPA finalized its finding that greenhouse gas emissions from vehicles endanger human health and the environment. This was a pre-requisite to issuance of its Light Duty Vehicle greenhouse gas standards.

Light Duty Vehicle GHG Standards- EPA has stated in prior rule packages that it expects to finalize this rule this March. This will be the first rule establishing actual emission limits for greenhouse gases. Once mandatory emission limits are established for vehicles, the Clean Air Act automatically requires certain provisions will apply to all other sources. New Source Review (NSR) will be triggered by emissions of greenhouse gases.

GHG Tailoring Rule- This is EPA's effort to change the triggers for NSR to fit GHG emissions. Without this rule very small sources would trigger federal air permitting requirements.

As EPA marches toward full blown regulation, attention shifts back to the Senate where a major battle over an amendment to block EPA's efforts is about to take place. This from Environmental Leader:

U.S. Sen. Lisa Murkowski (R-Alaska) is expected to introduce an amendment that would prevent the Environmental Protection Agency (EPA) from regulating greenhouse gas emissions (GHG) under the Clean Air Act, reports the Los Angeles Times.

Murkowski will either try to block the EPA by seeking an amendment to an unrelated debt bill due to go to vote on Jan. 20 or she will seek a resolution of disapproval, which would not be subject to filibuster and only need 51 votes to pass, reports the Guardian. She has the support of 34 Republicans and is reaching out to Democrats, according to the article.

Its going to be very difficult to find another seventeen votes to support the measure in the Senate. Therefore, businesses must be prepared for the major EPA's greenhouse regulations in March. Its a good time to be assessing your businesses exposure and risks using the proposed thresholds.

A new report regarding fine particulate pollution in the Midwest shows that achieving compliance with federal air quality standards is linked to U.S. EPA's fix for the Clean Air Interstate Rule (CAIR). The Lake Michigan Air Director's Consortium (LADCO) released its white paper discussing recommendation on addressing fine particulate (p.m. 2.5) pollution in the Midwest. The white paper includes these major findings:

The air quality studies demonstrated that high daily PM2.5 concentrations occur year-round, but are more likely in the winter and summer months, and are associated with elevated concentrations of particulate sulfate (especially in the summer), particulate nitrate (in the winter), and organic carbon (OC). Effective control programs for these PM species include:

Regional reductions in sulfur dioxide (SO2) emissions from EGUs and large non-EGUs

The report notes that, beside power plant sulfate emissions, PM levels are attributable to agricultural emissions, smoking cars and outdoor wood fireplaces. However, these types of sources are much more difficult to control.

Addressing smoking cars and auto emissions in general is always been a difficult task. Automobile testing, while continuing, is still very controversial.

Agricultural operations have fought long and hard to stay out of EPA regulation. The report acknowledges no federal program for reduction of agricultural ammonia emissions.

In contrast there has been a long track record for regulating power plant emissions. Starting with the acid rain program, then the NOx SIP call and finally CAIR- there have been three different cap and trade programs set up for reducing emissions. CAIR is critical because power plants are the largest source of SO2 emissions. (See post, CAIR Impact on Air Quality) The table below was taken from the report (EGU = Electric Generating Units).

Table 1. Annual SO2 Emissions in LADCO Region (1000 TPY)

2005

2012

2018

Point-EGU

2,826 (83%)

1,665 (77%)

1,468 (76%)

Point-NonEGU

470 (14%)

423 (20%)

393 (20%)

Area

47 (1%)

44 (2%)

42 (2%)

Nonroad

61 (2%)

16 (1%)

11 (1%)

On-road

20 (1%)

5 (--)

4 (--)

3,425

2,155

1,919

CAIR, under a cap and trade program, would dramatically reduce SO2 power plant emission in two phases- 2010 requires 50% reduction and 2015 requires 65% reduction. States are counting on the continued existence of CAIR to meet PM air quality standards. However, the D.C. Circuit Court tossed out CAIR as "fatally flawed." U.S. EPA is currently working on a "CAIR fix" to address the issues raised in the Court's decision.

LADCO's white paper makes it clear little thought is being given to what will happen if CAIR cannot be fixed. A review of the legal issues with CAIR shows the State's better start considering that possibility.

One of the central problems the Court noted with CAIR was its method for reducing the cap on SO2 emissions. The Clean Air Act establishes a value for acid rain allowances- one allowance is the right to emit one ton of SO2. CAIR attempted to reduce the cap by cutting the value of an acid rain allowance in half in 2010. The Court found this to be problematic because the value of acid rain allowances is set forth the Clean Air Act. The Court said:

Lest EPA forget, it is “a creature of statute,”
and has “only those authorities conferred upon it by Congress”;
“if there is no statute conferring authority, a federal agency has
none.”

CAIR, as program created by rule, cannot trump a statute. How U.S. EPA can possibly get around the Clean Air Act establishment of acid rain allowance to preserve CAIR reductions is perplexing.

The Court also questioned the fundamental basis of EPA's cap and trade program that it was not required to eliminate one state's contribution to another state's non-attainment problem. The Court said:

"Theoretically, sources in Alabama could purchase enough NOx and SO2 allowances to cover all their current emissions, resulting in no change in Alabama's contribution to Davidson County, North Carolina's non-attainment."

How U.S. EPA can legally show CAIR will address contribution from one state to another while at the same time preserving the cap and trade concept is also perplexing.

The past two days I have been in Houston at the Environmental Markets Association (EMA) fall conference. If you are not familiar with the EMA, it is an organization that supports the use of market-based solutions to environmental issues. The members are largely made up of consultants, traders of environmental credits and project developers.

Many of the members were on the ground floor when the first cap and trade programs were implemented in the 90's regarding acid rain. The also participated in the two cap and trade programs on utilities that followed acid rain- NOx SIP call and CAIR.

Finally, there is also expertise in the burgeoning carbon markets. Whether that involves the "voluntary markets" in the U.S., state mandatory programs like RGGI in the east, or the international cap and trade program in the European Union.

Bottom line, these folks have the expertise in trading various environmental credits under a wide range of programs. They have seen what has worked (acid rain) and what hasn't worked (collapse of the CAIR program).

The big topic of course is the Waxman-Markey and Kerry-Boxer bills pending in Congress. There was a lot of discussion regarding the various elements of these bills. From the various perspectives offered over the last few days I draw the following perspectives regarding the drive for a federal CO2 cap and trade program in the U.S.:

Complexity- Many expressed concern that the Waxman-Markey Bill is overly complex. That instead of focusing on setting up a core program- namely putting a price on carbon-the bill tries to dictate the minutia around the program. The more complex the program the more difficult it is to operate.

Offsets- Many concentrated on the debate over the domestic and international offset programs. There appeared to be consensus that an offset program was absolutely key to bringing down the cost of compliance. The concern expressed was that both Waxman-Markey and Boxer-Kerry put too many conditions on the offset program. These include limiting how many offsets each company can use for compliance. What types of offsets will qualify. How quickly EPA can certify the verification procedures for creating offsets.

Stabenow-Baucus Offsets Bill- This bill is seen as a mechanism to clean up what is wrong with the offset programs established in the other bills. A lot of hope was being placed on this being the vehicle to correct the problems.

EPA Preclusion- While not receiving a lot of attention, a huge difference between the House and Senate bills is whether EPA is precluded from regulating greenhouse gases under the Clean Air Act. House says EPA is precluded, Senate does not. As I have discussed on in prior posts, this is a huge issue. In fact, one of the main reasons to set up a cap and trade program is to pre-empt EPA from establishing an unworkable command and control program under the Clean Air Act.

Stability Reserve- This is the concept of trying to address carbon prices getting to high after the program is established. Rather than simply placing a cap on prices, both bills create the concept of a reserve of allowances that could be released if prices get to high. This is not a cap, if the trigger is met it allows future allowances to be auctioned off. EPA is supposed to take the proceeds from the auctions and purchase offsets to make the impact of releasing more allowance neutral. The concern on the stability reserves were: 1) the triggers to tap into the reserve and whether it really can control prices from getting too high; and 2) what happens if not enough offsets are available for EPA to purchase because all the limitations placed on which types of offset qualify.

Verification Procedures for Offsets- The Senate would require notice and comment on every offset project which was seen as overly cumbersome. The House allows pre-compliance offset credits to qualify for only 2009-2012. Also, projects must meet either a state verification procedure or one deemed by EPA as stringent as a state verification procedure. The short duration of pre-compliance offset projects was concerning because it may severely limit available offset credits after 2012. The limitations on verification procedures could disqualify many projects that went through non-state certified verification procedures.

Many more observations and comments were made. I certainly learned a lot from the experts who work have been working in environmental markets since the 1990's. Their expertise certainly should carry a lot of weight with Congress. Otherwise, we risk have politicians set up a program that is doomed to failure from the start.

On September 30th, U.S. EPA announced the release of its proposed rule regulating emissions of greenhouse gases (GHGs) from large industrial sources. The proposal represents a risky move by U.S. EPA in the event climate change legislative efforts fail and U.S. EPA is forced to move forward with the rules. The risk is two fold: 1) U.S. EPA's action is grounded in questionable legal authority; and 2) the action starts a process that eventually leads to regulation of small sources and issuance of millions of federal air permits.

Under the proposal, at least initially, only large industrial facilities that emit at least 25,000 tons of GHGs a year will be required to obtain construction and operating permits covering their emissions. The construction permits will come under U.S. EPA's New Source Review Program (NSR) and the operating permits will come under its Title V Program (Title V).

What does triggering NSR mean for these sources?

Once a source triggers NSR, it must go through a lengthy and complicated permitting review process. The review is designed to identify the best available control technology (BACT) which will reduce emission of the pollutant, in this case greenhouse gases (GHGs).

Unlike the proposed cap and trade legislation, each and every source triggering NSR will be required to go through this case by case review process and install controls. Under cap and trade, sources can either install controls or cover their emission by purchasing pollution permits (allowances). Therefore, cap and trades results in more cost effective reduction in emissions than a simple mandate on all sources.

What does coverage under Title V mean for these sources?

The Title V permit is meant to cover large sources that typically have multiple air permits or are subject to a variety of air pollution regulations. The purpose of Title V is to consolidate all these requirements into a single permit. Some Title V permits can be as large as 500 pages or more. Under the proposed rule, sources that emit more than 25,000 tons per year of CO2 or CO2 equivalent emissions (CO2e) will be required to obtain Title V permits.

What doesn't make sense is that some sources may only be covered by Title V permits because of their GHG emissions. This could result in the strange outcome of Title V permits that are virtually blank because those sources have very little other applicable air pollution regulations. The effectiveness of such an approach has to be questioned.

Key Issue: Established Thresholds Triggering NSR or Title V

Why is the EPA's action risky? The agency is proposing the "tailoring" thresholds applicable to GHG emissions that trigger regulation:

25,0000 tons of CO2e for new sources triggers NSR

an emission increase of between 10,000 and 25,000 tons of CO2e from existing sources following a modification to the facility will trigger NSR

Sources with 25,000 tons of CO2e will be required to obtain Title V permits after five years

Only problem is the Clean Air Act specifies the following thresholds:

100 tons from 28 specified industries trigger NSR for new sources

250 tons from all other types of sources trigger NSR for new sources

100 tons from any source triggers Title V

EPA notes that without modification of the thresholds 40,000 NSR permits would be triggered each year, where currently only 300 are triggered. Also, 6,000,000 sources would fall under the Title V program whereas the program only currently covers 15,000 sources.

"Normally, it takes an act of Congress to change the words of a statute enacted by Congress, and many of us are very curious to see EPA's legal justification for today's proposal,"

Major Risk #1- EPA could lose its legal argument that it has authority to raise the thresholds

How does the EPA claim it has the legal authority to raise the thresholds? Under the doctrines of "absurd results" and "administrative necessity." Both legal doctrines are similar in that Courts have recognized the ability of agencies to depart from the plain meaning of a statute if application would result in "absurd results" or there is an "administrative necessity."

EPA explains why these doctrines should apply in the preamble to the rule:

[T]o apply the statutory PSD (NSR) and title V applicability thresholds to sources of GHG emissions would bring tens of thousands of small sources and modifications into the PSD program each year, and millions of small sources into the title V program. This extraordinary increase in the scope of the permitting programs, coupled with the resulting burdens on the small sources and on the permitting authorities, were not contemplated by Congress in enacting the PSD and title V programs. Moreover, the administrative strains would lead to multi-year backlogs in the issuance of PSD and title V permits, which would undermine the purposes of those programs. Sources of all types- whether they emit GHGs or no- would face long delays in receiving PSD permits, which Congress intended to allow construction or expansion. Similarly, sources would face long delays in receiving Title V permits, which Congress intended to promote enforceability. (preamble pg. 20)

EPA goes on to state in the preamble that courts are "reluctant" to invoke the "absurd results" doctrine "precisely because it entails departing from the literal application of statutory provisions." However, EPA asserts this is "one of the rare cases" where it should apply. (preamble pg. 63)

If the Court disagrees with EPA's legal rationale, the rule would be rendered illegal and sent back to U.S. EPA. However, even without the "tailoring rule" NSR and title V would apply to GHG emissions.

EPA has stated its intent to move forward with other climate change regulations, such as the light-duty vehicle rule (which EPA says will be finalized no later than March 2010). After these rules are finalized, GHGs are considered a "regulated pollutant." If the attempt to raise the thresholds is thrown out, GHG status of a "regulated pollutant" would mandate application of the 100/250 ton NSR and 100 tons thresholds set forth in the Clean Air Act.

For this reason EPA's proposed rule represents a major gamble. Perhaps that is the leverage they are looking for in the climate change legislative negotiations. However, if things fall apart EPA may have crossed the point of no return.

Major Risk #2: The thresholds are temporary in nature resulting in regulation of much smaller sources in the future.

“This is a common sense rule that is carefully tailored to apply to only the largest sources -- those from sectors responsible for nearly 70 percent of U.S. greenhouse gas emissions sources. This rule allows us to do what the Clean Air Act does best – reduce emissions for better health, drive technology innovation for a better economy, and protect the environment for a better future – all without placing an undue burden on the businesses that make up the better part of our economy.”

Defenders of the status quo are going to oppose this with everything they have. Very soon, we will hear about doomsday scenarios – with EPA regulating everything from cows to the local Dunkin’ Donuts. But let’s be clear: that is not going to happen. We have carefully targeted our efforts to exempt the vast majority of small and medium-sized businesses. We know the corner coffee shop is no place to look for meaningful carbon reductions.

While I do not assert EPA is going to regulating the local Dunkin' Donuts, I do think the EPA's description that it will only apply to the largest sources is misleading. EPA makes clear through out its preamble that the proposed 25,000 CO2e thresholds represents only a "first phase" of the rule. This is because EPA believes the "absurd results" and "administrative necessity" doctrines, if applicable, only provide temporary relief from the Clean Air Act stated thresholds.

EPA says that "if variance from the statutory requirements nevertheless is necessary to allow administrability, the variance must be limited as much as possible." (preamble pg. 20). EPA describes the process in its preamble as follows:

The first phase, which would last 6 years, would establish a temporary level for the PSD and title V applicability thresholds at 25,000 tons per year (tpy), on "carbon dioxide equivalent" (CO2e) basis, and a temporary PSD significance level for GHG emissions of between 10,000 and 25,000 tpy CO2e. EPA would also take other streamlining actions during this time. Within 5 years of the final version of this rule, EPA would conduct a study to assess the administrability issues. The, EPA would conduct another rulemaking, to be completed by the end of the sixth year, that would promulgate, as the second phase, revised applicability and significance level thresholds and other streamlining techniques, as appropriate. (preamble pg.2)

EPA contemplates taking "streamlining activities" vaguely referenced as changing potential to emit calculations as well as creation of general permits. EPA also states "we expect permitting authorities to ramp up resources for permit issuance." (preamble pg. 64). Taking these actions will allow EPA to "bridge the gap between literal language and congressional intent", thereby making it possible to "include more of these sources" in the NSR and Title V program. (preamble pg. 70).

As a result, EPA is clearly stating its intent that more and more sources fall under the NSR and title V programs by gradually reducing the thresholds over time down to the Clean Air Act statutorily established thresholds. While EPA may state that their intent is to only gradually phase in smaller source over many years, the argument will be how quickly can "streamlining" techniques be implemented and more permit reviewers hired to bring more and more sources under the program.

Therefore, EPA's proposed rule fails to set forth a policy statement that regulation of small sources of GHGs is illogical. Rather, EPA states it needs more time and resources to bring these sources under the program. By no means am I a defender of the status quo, but it is certainly fair to question whether this is the best approach to addressing climate change.

As reported in BNA and referenced in Foley & Hoag's blog, EPA is rumored to be moving forward with application of New Source Review requirements to large sources of greenhouse gas emissions. BNA reported that EPA would likely set a trigger level of 25,000 tons of carbon dioxide or carbon dioxide equivalent emissions (other greenhouse gases converted into CO2 tons). All sources emitting above this threshold would have to include Best Available Control Technology (BACT) to reduce greenhouse gas emissions.

Missing in the strong opposition to cap & trade is the alternative- regulation of greenhouse gases under the existing authority of the Clean Air Act. U.S. EPA has been in a holding pattern seemingly holding their collective breath that legislation will pass thereby avoiding a regulatory nightmare. However, with opposition growing perhaps EPA is starting see that it needs to raise the prospects of alternative regulatory schemes. The timing of the proposal to included greenhouse gases under New Source Review would appear to support that view.

While the article states that EPA would apply NSR only to the largest sources of greenhouse gases (25,000 tons of CO2), EPA has questionable legal authority to limit application in this fashion. The current statutory language in the Clean Air Act applies NSR to source emitting more than 250 tons of any pollutant. EPA has said before it has no intention of setting the threshold that low. However, that is what the Clean Air Act states is the applicable threshold. Without legislation it certainly seems very questionable as whether EPA has the authority to alter statutory text through regulation.

There appears no doubt that if cap & trade dies this fall that EPA will move forward with a positive endangerment finding and start to issue climate change regulations under its existing authority. Yet the debate in Congress right now seems to be cap & trade versus no regulation. EPA, businesses and environmental groups supporting ACES need to do a better job of framing the debate as- cap & trade versus command and control regulation under the Clean Air Act. If more organizations engaged in the debate in a realistic manner, including NAM, the merits of cap & trade seem to be much greater.

As an indication we are still in the denial phase by some, the U.S. Chamber of Commerce wants to put climate change on trial. As reported on Yale 360:

Facing the prospect that the federal government may soon begin regulating greenhouse gas emissions, the U.S. Chamber of Commerce is proposing a public hearing in which the chamber and allied scientists question whether human-caused global warming is real. William Kovacs, the chamber’s senior vice-president for environment, technology, and regulatory affairs, is asking the U.S. Environmental Protection Agency (EPA) to hold the rare public hearing, complete with witnesses, cross-examinations, and a judge who would rule whether man is indeed warming the planet.

This ignores the fact that we already had that trial in front of the U.S. Supreme Court in landmark case of Massachusetts v. EPA. The Court found climate change to be real and recognized EPA's existing authority to regulated greenhouse gases. This from the syllabus of the decision:

Based on respected scientific opinion that a well-documented rise in global temperatures and attendant climatological and environmental changes have resulted from a significant increase in the atmospheric concentration of “greenhouse gases,”

I wonder when the debate over cap & trade will start to honestly include a discussion of this legal reality?

Manufacturing represents one the largest employment sectors in Ohio (ranking 3rd nationally with 1.1 million workers as of 2006)

These two factors combine to raise the stakes significantly if a price is placed on carbon as a result of the cap-and-trade ACES proposal. Coal-fired power plants are the largest source of greenhouse gases (GHGs). Any regulatory approach that puts a price on GHGs will result in higher energy prices.

Most manufacturers are not even covered under ACES because only the largest industrial sources are capped (25,000 metric tons or more). However, the secondary effect of ACES- rising energy prices-could mean significant job losses in the manufacturing sector which is heavy user of power

Potential Job Loses from Cap-and-Trade

A report released last week by the National Association of Manufacturers (NAM) projected that Ohio could lose from 80,000 to 108,000 jobs by 2030 if ACES passes. The job losses are directly attributable to rising energy prices. The NAM cap-and-trade report projects the following increases in commodities or electricity:

26% increase in gasoline prices

60% increase in electricity prices

79% increase in natural gas prices

The 60% increase is actually conservative when compared to other studies. Some have said total increases could be as high as 112% by 2030. Such large price increases raise operating costs for many small and medium manufacturers. Those cost increases will make many business unprofitable forcing them to close their doors, so the argument goes.

Is this really a complete analysis? Also, is opposition to ACES really the correct strategy?

A Call to Action- Diversity in Generation Key for Coal Dependent States

Based on my last two posts you may be expecting me argue that growth in green jobs attributable renewable energy development will significantly offset the manufacturing job loses. For example, in 2008 there was a 70% increase in wind turbine related jobs nationally.

While green jobs are important, a more fundamental issue presents itself- When it comes to preserving manufacturing jobs, reliance on coal power is unsustainable.

The cost of energy produced from coal is going to dramatically increase regardless of whether climate change legislation passes. A complex web of regulatory forces are at work driving coal energy prices higher over the next decade and into the future. A honest assessment of these factors should serve as call to action- diversification.

An honest assessment of the forces at play demonstrates that coal reliant states are fighting a losing battle against energy price increases. States must diversify their generation portfolios in order to become less sensitive to these forthcoming price shocks. This means development of biomass, nuclear, wind, solar and other forms of electric generation.

The fix for the Clean Air Interstate Rule or Multi-Pollutant Legislation

Mercury controls

Ever tightening ozone and fine particle federal air standards (NAAQS)

Massachusetts v. U.S. = regulation of greenhouse gases in some fashion

New Source Review (NSR) Enforcement Cases

Manufacturers and other businesses in the Ohio and throughout the Midwest have yet to see the full impact of the NSR enforcement cases on the price of energy. The settlement with American Electric Power impacts sixteen (16) coal plants and is estimated to cost $4.6 billion. Ohio Edison, subsidiary of FirstEnergy Corp., settled its NSR case in 2005. The settlement is projected to cost $1.1 billion to retrofit the Sammis Station. The litigation has yet to fully conclude in the Duke Energy case and while the verdict was mixed, the case will still result in significant compliance costs.

Also, a New Source Review regulatory fix seems unrealistic in the near term. Therefore, future projects that could improve plant efficiency may be avoided out of fear of triggering NSR.

Bottom line: Billions in new compliance costs for coal fired power plants over the next several years and an uncertain regulatory structure.

CAIR or Multi-Pollutant Legislation

The Clean Air Interstate Rule (CAIR) was a cap-and-trade regulation directed at coal-fired power plant emission of SO2 and NOx. On July 11, 2008, a federal court found CAIR to be inconsistent with the Clean Air Act. While the rule remains in place while U.S. EPA develops a fix, U.S. EPA has put a CAIR-fix on the fast track. It is uncertain what the "new-CAIR" program will look like, but there is little doubt it will result in a more expensive regulation.

As an alternative to CAIR, members of Congress have proposed multi-pollutant cap-and-trade legislation for coal fired power plants. Regardless of whether CAIR remains as regulatory based or converts to legislation the consensus among Democrats was the Bush Administration rule did not require steep enough cuts from coal-fired power plants.

Bottom line: Either the CAIR fix or multi-pollutant legislation will raise compliance costs for coal-fired utilities

Mercury Controls

Based upon cost concerns, the Bush Administration rejected facility specific regulation of mercury emissions from coal-fired power plants. Instead, the Administration proposed a new cap-and-trade program called the Clean Air Mercury Rule (CAMR). A federal court ruled that mercury as a pollutant could not be regulated through a cap-and-trade mechanism. On February 6, 2009, the Department of Justice (on behalf of the Obama Administration) dismissed its appeal to the U.S. Supreme Court. U.S. EPA is currently developing regulations under Section 112 of the Clean Air Act that will require every coal-fired power plant to control mercury emissions.

Bottom line: All facilities may be required to reduce mercury emissions through carbon absorption or implementation of other technologies. Under CAMR, utilities were hoping to avoid controls on some of the older less efficient plants. The rejection of CAMR will drive compliance costs higher.

Ozone and Fine Particle Air Quality Standards

Coal-fired power plant contribute roughly one-third (1/3) of ozone causing pollutants and particulate matter pollution. As U.S. EPA tightens the ozone and fine particle National Ambient Air Quality Standards (NAAQS), coal-fired power plants will remain a major target of tighter regulation.

Bottom line: States pass new regulations to meet tighter federal air quality standards. There is lag time between development of new federal standards and implementation of these new state regulations. States will be forced to contemplate even stricter regulation of coal-fired power plants as a result of tighter federal standards.

Bottom line: The debate cannot be framed as pass cap-and-trade or have no climate change regulations. Regulation is inevitable and most agree cap-and-trade is much more cost effective than regulation under the Clean Air Act.

The American Clean Energy and Security (ACES) Act of 2009 has cleared one hurdle through passage by the House Energy and Commerce Committee. The bill now makes its way through at least two more House Committees before a floor vote will occur. The House leadership has set an aggressive time frame for passage, Speaker Pelosi has said the remaining Committees must finish their work by June 19th. This leads to the possibility of a floor vote no later than the end of the month or early July.

While the ACES legislation appears to be moving quickly, major issues remain with the structure of the legislation as well as its timing. The Senate does not have a companion bill and many speculate the Senate will be unwilling to simply take of the Waxman-Markey Bill. Therefore, a tremendous amount of uncertainty remains as to the approach the Senate will use to take up climate change legislation.

What are the possible issues that will be debated in House Committee hearings and in the Senate? Some will include the following:

5 year Phase Out of Allocations- The mark up version of the ACES legislation saw a significant compromise on the auction v. allocation debate. Whereas, the President had proposed a 100% auction, ACES only calls for a 35% auction in the early years. However, the bill still proposes an aggressive phase out of allocations for the energy sector. (See Pew Chart to Left that show dramatic shift downward in allocations during 2025-2030 - click on chart to enlarge) While it may seem like a long way off, in a five year period stretching from 2025-2030 the legislation phases out allocations moving to 90% auction of allowances. Industry is concerned that this aggressive phase out period will lead to price spikes in utility costs.

2020 Emission CAP- Emission reductions called for in the initial years was reduced. The first major milestone of the cap is seen as 2020. The original bill called for a 20% reduction below 2005 levels. The mark up reduced that to a 17% reduction by 2020. However, some forget that President Obama had called for a 14% reduction by 2020. There are many industry representatives who believe the early reductions still need to be softened to make the bill workable. There may be a renewed push to bring the 2020 cap down to the 14% reduction.

2012 Start Date- The Legislation calls for a modest 3% reduction in 2012. However, some in industry believe 2012 is too early and does not give adequate lead time to prepare for the cap. During an EMA presentation, Bruce Braine, Vice President of AEP, commented that the 2012 time frame may force switching to natural gas that will result in price spikes in the first year the cap is effective.

International Offsets- In the face of widespread controversy regarding the European Trading Scheme (ETS) use of offsets, the bill includes many limitations on use of international offsets. Beginning in 2018, there is an automatic 20% discount in the value of international offsets. The bill limits use of international offsets to those categories of projects that have received approval by U.S. EPA. In addition, there is a sector limitation on use. Sectors in various countries will be identified where offsets are deemed appropriate (factors includes GDP and receiving equal treatment in project host country). Finally, there must a an applicable bi-national or multi-national treaty in effect with the Country. Industry is concerned that these requirements will reduce the availability of international offsets thereby driving up the cost of compliance.

Environmentalist Perspective- The consensus among the environmental community appears to be that the "watering down" of the ACES legislation was necessary to secure passage. Therefore, even with the dramatic shift away from auction of allowances, most groups still support the Legislation. The key issue from an environmentalist perspective is the proverbial "line in the sand" to prevent additional changes, including concessions to industry on the issues mentioned above in the Senate.

Ideology v. Realism- Republicans who have uniformly opposed the carbon cap and trade legislation. Even though industry support for the Legislation has grown, many Republicans have had success describing the Legislation as a large tax increase during a down economy. This message plays well even with some Democrats from the Midwest and Southern States that face the greatest impacts from climate change legislation. The "realism" aspect is that regulation of greenhouse gases appears inevitable. A market based solution is clearly a better alternative to command and control regulation under the Clean Air Act. However, are some members of Congress in denial that regulation is inevitable?

Obviously, ACES went through a dramatic transformation to gain passage from the House Energy and Commerce Committee. The overwhelming majority of changes were to address industry concerns with the Legislation. The most important changes were the shift away from auction of allowances and reduced reduction targets in the early years of the cap.

Additional battles may be looming in the House over the issues identified above and others. However, the most important battle ground remains the U.S. Senate where the future is less certain.

Representatives Waxman and Markey released their much anticipated re-write of their proposed cap and trade climate legislation earlier this week. Much speculation has been offered in the media that the bill had no chance of passing as it was originally structured, if it had any chance at all.

Well, there has apparently been a lot of horse trading going on to shore up Democratic support for the bill. Most notably, President Obama's proposal to have 100% auction of allowances (pollution permits) has been completely tossed out. The revised legislation allocates that majority of allowances to industry.

In the past two and half years, the Committee has held dozens of hearings on energy and climate change policy and has built a detailed factual record on the need for legislation in this area. The nation's dependence on foreign oil has significantly increased over the last decade. Consumers have faced increasing and volatile energy prices. Other countries have overtaken us in the manufacture of wind and solar energy. Energy company investments are paralyzed because of uncertainty about what policies the Congress will establish. Meanwhile, global warming has increased unchecked.

Isn't iit a little odd that global warming is not emphasized as the main reason for the legislation. There is no discussion at all of the increased threat of climate change and the need to act. Rather, its about foriegn oil and renewable power. That seems strange to me, after all it is a multi-billion dollar cap and trade program to reduce greenhouse gases.

It is clear the choice in messaging is in reaction to the headway Republicans and conservative Democrats have made in raising concerns about the timing and cost of the legislation. In a very difficult economy its hard to gain support for costly new programs, especially programs on the scale called for in this legislation.

In reaction to this strong criticism we find a re-worked bill that provides the lion share of allowances to industry as well as other hedges against the potential cost of the program. I am not criticizing the approach, rather I am commenting on the unrealistic nature of the President's 100% auction proposal. This is a massive new environmental regulatory program, one that is greater in scope than any previous programs. It makes sense to transition toward a carbon regulated economy.

Here are some of the more notable provisions in the legislation:

Reduction Targets- Reductions from covered sources to 97% of 2005 levels by 2012, 83% by 2020, 58% by 17% by 2050. Here is one of the changes that is meant to ease into a carbon constrained world. The reductions have been diminished in the early years to ease the transition. While it helps out in the early years, at some point we face a major spike in needed reductions. That may be a difficult issue to overcome.

Who is covered by the Cap?- By year the cap kicks in--- Group 2012: Electricity generators, liquid fuel refiners, and fluorinated gas manufacturers. Group 2014: Industrial sources that emit more than 25,000 tons of carbon dioxide equivalent per year. Group 2016: Natural gas local distribution companies.

Allowance allocation- Coal related: 30% to local electric distribution companies regulated by the states. 5% to merchant coal generators. Natural gas related: 9% of allowances to local distribution companies. Home heating oil and propane: 1.5% to state programs for users of home heating oil or propane.

Auction- approximately 15% of allowances will be auctioned beginning 2011 and proceeds directed to low and moderate income families to address increases in energy prices. This is a far cry from the President's proposal of 100% auction.

Offsets- Covered entities are able to offset up to 2 billion tons of emissions by using EPA-approved domestic and international offset credits. The ability to use the credits is divided according to the legislation's allocation formula. By 2017, the price to use international offsets is increased. Covered entities must use five tons of international offset credits for every four tons of emissions being offset. Offsets are designed to reduce the cost of compliance. Industries covered by the cap can purchase credits generated by projects outside of the cap. Offset credits would be cheaper than allowances thereby reducing the cost of compliance. It also creates a whole new business for companies that specialize in carbon offset credit projects.

Offset Integrity Advisory Board- Board provides recommendations to EPA as to type of offset projects that should be listed by EPA as eligible; appropriate quantification methodologies, etc... The bill contains multiple safeguards to try and improve the integrity of offsets. These provisions have been included to address the criticism the European Trading Scheme has received regarding the lack of creditability of offsets used in Europe's Cap and Trade program.

National Renewable Portfolio Standard- Includes a requirement that retail electric suppliers provide 6% from renewable energy sources by 2010. The standard rises to 20% by 2020. Up to one quarter of the 20% requirement can be met through energy efficiency projects.

Clean Air Act Exemptions- The bill would specifically exempt greenhouse gases from coverage under the Title V program, New Source Review Program, NAAQS, and HAPs.

Number 8- is a huge positive factor arguing in favor of the cap and trade approach. As detailed on this blog many times, regulation of greenhouse gases under the Clean Air Act would be a disaster. It would result in over regulation of small sources, inefficient permitting which would slow projects and significant amounts of litigation.

Dspite the recent media coverage, I don't see how EPA backs away from the cliff at this point. Three are too many things set in motion for EPA to move away from regulation under the Clean Air Act unless legislation is passed. Cap and trade legislation, especially a bill that calls for a smooth transition to a carbon regulated world is just a far better alternative.

As reported by the AP, "White House Memo Challenges Finding on Warming", an OMB document contains opinions that regulation of the greenhouse gases under the Clean Air Act could have dramatic impacts on the economy. The release of the OMB memo seems to have put the Obama Administration on the defensive.

Major news outlets including the N.Y Times, Wall Street Journal and Associated Press reported the uproar regarding the memo. Here is how the Associated Press described the controversy surrounding the memo:

An Environmental Protection Agency proposal that could lead to regulating the gases blamed for global warming will prove costly for factories, small businesses and other institutions, according to a White House document.

The nine-page memo is a compilation of opinions made by a dozen federal agencies and departments during an internal review before the EPA issued a finding in April that greenhouse gases pose dangers to public health and welfare.

That finding could set in motion for the first time the regulation of six heat-trapping gases from cars and trucks, factories and other sources under the Clean Air Act.

On Capital Hill, EPA Administrator Lisa Jackson faced questions from Senators regarding the memo (video of her testimony). The memo was described by some as the "smoking gun" that supported Republican and business claims that regulation of greenhouse gases under the Clean Air Act would have a devastating impact on the economy.

The memo also called into question EPA's claim that the scientific underpinnings for its proposed endangerment finding made an "overwhelming" case for regulation due to the threats presented by climate change. As reported in the Wall Street Journal, the memo criticized EPA's scientific support for the endangerment finding:

“The amount of acknowledged lack of understanding about the basic facts surrounding [greenhouse gases] seem to stretch the precautionary principle to providing regulation in the face of unprecedented uncertainty,” the memo reads.

After the release of the memo and the ensuing uproar, the Wall Street Journal suggested EPA may be wavering in its commitment to regulate greenhouse gases under the Clean Air Act. Such conclusions seem to be supported by statements made by the Director,of OMB Peter Orszag, on his blog.

Media reports today are suggesting that OMB has found fault with EPA’s proposed finding that emissions of greenhouse gases from motor vehicles contribute to air pollution that endangers public health and welfare. Any reports suggesting that OMB was opposed to the finding are unfounded...

Perhaps more importantly, OMB concluded review of the preliminary finding several weeks ago, which then allowed EPA to move forward with the proposed finding. As I wrote on this blog on April 17, the "proposed finding is carefully rooted in both law and science." I also noted: "By itself, the EPA’s proposed finding imposes no regulation. (Indeed, by itself, it requires nothing at all.) If and when the endangerment finding is made final, the EPA will turn to the question whether and how to regulate greenhouse gas emissions from new automobiles."

Orszag seems to be going out of his way to minimize the significance of the endangerment finding. Such statement belittle the fact that if the endangerment finding is finalized it will set in motion significant regulation of sources under the Clean Air Act.

After reading the the coverage, I just don't understand all the fuss. Of course regulation under the Clean Air Act would have dramatic impacts on the economy. U.S. EPA's Advanced Notice of Public Rulemaking (ANPR) sets forth numerous examples of the difficulties and issues associated with regulation under the Act. Even though the ANPR was written during the Bush years, the issues it identifies remain valid. I have written numerous posts discussing how the structure of the Clean Air Act is ill-suited for regulating greenhouse gases.

Lets face it, the Obama Administration understands these issues as well. That is why it has been using the threat of regulation to leverage passage of cap and trade legislation. EPA Administrator Jackson reiterated support for cap and trade legislation today.

Thus far the Administration has taken very slow and deliberate steps toward regulation. Many critical decisions related to climate change are under "EPA review " or in the draft stage. To date, environmental groups have been content to let the Administration move forward at its own pace. They are convinced regulation is inevitable.

How long can EPA realistically string out the decisions on whether to address climate change under the Clean Air Act? The longer the string out the decision, the less effective EPA's threats are in leveraging Congress. At some point, Congress may just be convinced EPA is bluffing.

Democratic leaders of the US House Energy and Commerce Committee agreed to hold another hearing on climate change legislation on May 1. As discussed by commentators with the Environmental Markets Association, some Washington Insiders believe this announcement is a clear indication the Waxman-Markey Climate Legislation won't make it.

Republican have hammered home the unknown costs of the proposal and seem to be getting traction during this tough economic time. As reported in the Oil and Gas Journal, the minority party is still flexing its muscles:

"It is our intention to use the opportunity you are providing us this Friday to carefully examine the one element of the legislation that has so far escaped examination in 38 hearings stretching over 40 days, its cost," the two GOP committee members said.

Republicans have found a sympathetic group among Democrats from states that rely on coal and manufacturing to drive their economies. As reported in Politico, while Rep. Dingell may have lost his leadership position he is still finding sympathetic fellow Democrats willing to support further concessions to protect industry in their states:

But dethroning Dingell didn’t change the membership of the committee, and there are plenty of Dingell Democrats left on the panel — Rust Belt, coal state and Southern Democrats who want to protect native industries as they negotiate the final terms of a sweeping climate change bill. And that’s why Waxman has his hands full winning votes in the committee, and it’s one of the reasons he moved Monday to postpone a bill markup scheduled for this week.

Meanwhile the "fuse has been lit" by EPA on moving forward with regulation of greenhouse gases under the existing authority in the Clean Air Act. Many commentators speculate that EPA and the Obama Administration are using this as a tactic to push the climate change legislation through Congress, even if they are correct that may be a tactic that back fires.

If Congress does not act, I see no way EPA reverses course on its Endangerment Finding or California's Waiver request to set GHGs limits for vehicles. Furthermore, EPA is reconsidering the Bush Administration decision to not require CO2 controls for coal plants.

Even if EPA does not move forward with a full blow set of regulations to regulate GHGs, these actions will lay the ground work for Environmental groups to assert no new permits can be issued without CO2 controls. If there are concerns about the costs of climate legislation, everyone should be asking what the implications of these EPA actions will be on permitting and associated economic development.

I am a bit behind in writing a post about EPA's release of its endangerment finding. Earth Day seems like the perfect day to catch up and take advantage of the last few days to look at the reaction and likely consequences of EPA's significant new action.

Background: In Massachusetts v. EPA decided in April of 2007, the Supreme Court held that greenhouse gases (GHGs) are pollutants that may be regulated under the Clean Air Act. But the Court did not go far enough to say EPA must regulate GHGs. At issue was Section 202 of the Clean Air Act which covers regulation of greenhouse gases from motor vehicles.

Under Section 202: The Administrator shall by regulation prescribe standards applicable to the emission of any air pollutant(s) from motor vehicles, “which in his judgment cause, or contribute to, air pollution which may reasonably be anticipated to endanger public health or welfare.”

The Court said EPA must conclude GHGs from motor vehicles endanger public health (i.e. "endangerment finding") before any regulation of emissions (tail pipe or fuel standards) from motor vehicles can occur. The Court remanded the Section 202 determination to EPA to make a legally defensible finding as to whether motor vehicle GHG emissions endanger public health.

Key Legal Issues Discussed in EPA's Proposed Action: On April 17th, Administrator Jackson issued a proposed finding that vehicle emissions of GHGs do endanger public health. There is now a 60 day public comment period on the proposed action.

A key legal issue analyzed in the proposed action is whether Section 202 requires "actual harm" from a pollutant before it can be regulated. EPA's proposed rule discusses the legislative history behind the language in Section 202 and concludes no finding of actual harm is necessary:

As the Committee further explained, the phrase “may reasonably be anticipated” points the Administrator in the direction of assessing current and future risks rather than waiting for proof of actual harm.

Also, EPA's proposed action rejects the notion a demonstration is needed that controlling GHG emissions from U.S. autos would actually make a difference in addressing climate change. The EPA cited to language in the Supreme Court's Massachusetts v. EPA :

Moreover, as the Supreme Court recognized, “[a]gencies, like legislatures, do not generally resolve massive problems in one fell regulatory swoop.”

Science and Findings in EPA's Proposed Action: There is no new science behind the endangerment finding. Administrator Jackson relies on reports and conclusions from the U.S. Climate Change Science Program, the National Research Council, and the Intergovernmental Panel on Climate Change. She found these reports to provide more than sufficient support that GHG pose a "risk" to public health that should be addressed.

Here is how EPA has described its action on its web page and in supporting documentation:

The Administrator signed a proposal with two distinct findings regarding greenhouse gases under section 202(a) of the Clean Air Act:

1) The Administrator is proposing to find that the current and projected concentrations of the mix of six key greenhouse gases—carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6)—in the atmosphere threaten the public health and welfare of current and future generations. This is referred to as the endangerment finding.

2) The Administrator is further proposing to find that the combined emissions of CO2, CH4, N2O, and HFCs from new motor vehicles and motor vehicle engines contribute to the atmospheric concentrations of these key greenhouse gases and hence to the threat of climate change. This is referred to as the cause or contribute finding.

This proposed action, as well as any final action in the future, would not itself impose any requirements on industry or other entities. An endangerment finding under one provision of the Clean Air Act would not by itself automatically trigger regulation under the entire Act

This last statement is very interesting.

Does "Endangerment" = "Regulation": Obviously the positive endangerment finding itself has major consequences. There is no doubt it sets EPA on a path to regulate GHGs under the Clean Air Act unless Congress passes a cap and trade bill as substitute regulation. While the path is set, the timing is in question. Does this proposed action by itself mean all other sources that emit GHGs (beyond just motor vehicles) are subject to regulation under the Clean Air Act?

Deseret Power was an appeal of a coal permit in which Sierra Club argued the permit was invalid because it didn't include controls for GHGs. The Environmental Board of Review said it was an open question as to whether GHG are considered "regulated pollutants" under the Clean Air Act. Sierra Club pointed to existing requirements to monitor CO2 emissions as evidence of regulation. The EAB said EPA had discretion to decide whether monitoring was enough to amount to regulation.

THIS IS A HUGE ISSUE...If GHGs are regulated pollutants, then no additional legislation, rulemaking or action is necessary. EPA could not issue permits to sources of GHGs without considering controls for those emissions.

Footnote 29 of the Endangerment Finding: So does EPA's proposed endangerment finding amount to "regulation" of GHGs under the Clean Air Act? Buried in footnote 29 on page 106 of the Proposed Rule is to me one of the most significant consequences flowing from a positive endangerment finding- does the finding amount to regulation. Here is what footnote 29 says:

At this time, a final positive endangerment finding would not make the air pollutant found to cause or contribute to air pollution that endangers a regulated pollutant under the CAA’s Prevention of Significant Deterioration (PSD) program. See memorandum entitled “EPA’s Interpretation of Regulations that Determine Pollutants Covered By Federal Prevention of Significant Deterioration (PSD) Permit Program” (Dec. 18, 2008). EPA is reconsidering this memorandum and
will be seeking public comment on the issues raised in it. That proceeding, not this rulemaking, would be the appropriate venue for submitting comments on the issue of whether a final, positive endangerment finding under section 202(a) of the Act should trigger the PSD program, and the implications of the definition of air pollutant in that endangerment finding on the PSD program.

EPA's footnote is confusing. The issue in the reconsideration on the Johnson memo really should be limited to whether monitoring is sufficient to constitute "regulation" under the Act. An endangerment finding would be a new action by EPA that will take place after Deseret Power was issued, after the Johnson Memo was written and after EPA granted the reconsideration of the Sierra Club petition.

Perhaps the final action on the review of the Johnson memo will make this debate moot. It certainly will if that action is to say GHG's are a regulated pollutant based upon monitoring requirements alone. However, anything other than that outcome will allow the endangerment finding to be new grounds to argue GHGs are regulated under the Act. In a prior post I discussed what a horrible outcome that would be as a regulatory approach.

Final Comment: Once again, to those questioning the merits of a Cap and Trade market mechanism for controlling GHGs- consider the alternative. Like it or not EPA is on a path to regulate GHGs. Due to the Supreme Court's holding in Massachusetts v EPA, there is no getting off that path or turning around.

(see the extended entry for discussion of the reaction to EPA's action)

Deniers: Here was reaction from the Congressional denier of climate change, Sen. James Inhofe:

This move by EPA will unleash a torrent of regulations that will destroy jobs, harm consumers, and extend the agency’s reach into every corner of American life. While such regulations will create another massive burden on the economy, there will be no positive effect on global climate change as a result.

The Senator goes on to also blast the alternative to regulation of GHGs under the Clean Air Act- Cap and Trade. He seriously argues that Congress should pass a bill blocking EPA from enacting any regulation of GHGs.

Obama's Climate Czar-Carol Browner: The Washington Times reported that White House climate czar Carol Browner told a gathering in Boston earlier this month that it would be unlikely that the so-called "endangerment finding" would actually be used to regulate carbon dioxide.

She can only make this statement assuming a cap and trade bill passes. What if it doesn't? Or its significantly delayed? EPA cannot stop the train it has boarded. Without legislation the endangerment finding and ensuing regulations of GHGs under the Clean Air Act will be the regulatory mechanism.

Environmental Groups: All see this move as a game of chicken with Congress. As detailed in the blog, Solve Climate, environmental groups see the endangerment finding as pressuring Congress to Act. Still, given Washington, someone should be asking...what if the fail to?

Go it Slow Approach: As detailed in the Wall Street Journal, "on a conference call Friday with environmentalists, EPA officials stressed they would take a go-slow approach, holding two public hearings next month before the findings are official. After that, any new regulations would go through a public comment period, more hearings and a long review. New regulations driven by the finding could be years away."

This "go it slow" position assumes that the additional rules are need to trigger regulation of GHGs under the Clean Air Act. As detailed in my post, new new regulations could be needed. Regulation would start soon after the endangerment finding is finalized.

House Energy and Commerce Committee Chairman Henry Waxman (D-Calif.) and Chairman of the Energy and Environment Subcommittee Edward J. Markey (D-Mass.) introduced the “The American Clean Energy and Security Act” as the opening salvo in a contentious and complex debate over a greenhouse cap and trade program. The bill links two major and independently controversial proposals: 1) a nationwide cap on greenhouse gases (GHGs); and 2) a national renewable standard and energy efficiency.

The bill would:

Cut national greenhouse gas emissions 20 percent from 2005 levels by 2020-this is slightly more aggressive than similar measures pushed by the Obama Administration. Overall the goal is to cut GHG emissions by 85% by 2050 when compared to 2005 levels

Reduce electricity demand by 15% by 2020

Nationwide renewable energy standard which requires 25 percent of the Country's energy generation be met through wind, solar and other renewables.

The bill forms a skeletal framework, but leaves major controversial components open to debate. (See summary of the American Clean Energy and Security Act) For example, the bill does not address whether pollution allowances under the cap and trade program would be 100% auctioned or 100% allocated to industry or somewhere in between. The fact the bill does not even make a proposal on this component suggest the drafters understand a deal will need to be struck to give a chance for the bill to pass.

US Climate Action Partnership -- a coalition of businesses and environmental groups -- called the bill a good starting point. The bill makes several key concessions to Industry: a) allowing domestic and international offsets; b) provides C02 and other GHGs cannot be regulated as criteria pollutants or hazardous air pollutants under the Clean Air Act; c) creates a strategic reserve of allowance in the event allowance prices are too high; and d) allows unlimited banking of allowances.

However, the bill also includes proposals that will raise concerns with Industry beyond the major concern-should the U.S. have a cap and trade system to control GHGs? While the bill essentially exempts GHGs from traditional regulation under the Clean Air Act (a major advantage of legislation), it directs EPA to set up a new regulatory program to curb GHG emission by sources that are not covered by the Cap. The bill also does not create any kind of so called "safety valve" which is a limit on the price of allowances. While the strategic reserve concept allows some cushion, it only provides for release of more allowances into the pool it does not set a ceiling on the price of an allowance.

Week of April 27: Energy and Environment Subcommittee Markup Period Begins

Week of May 11: Full Energy and Commerce Committee Markup Period Begins

This appears to be a highly ambitious schedule given the level of controversy and major components of the bill open to debate. Passage will be still very questionable. You will have virtually no support among Republicans. You will have Democrats in coal states worried about the cost impacts of cap and trade on utilities. You will have Democrats and Republicans in Southern states very concerned about the national renewable energy standard.

For the bill to pass, major components will likely have to be restructured. I am certain there will be plenty to write about regarding the bill in the coming weeks and months.

Here are some snapshots of some of the latest developments regarding the Congressional debate over cap and trade legislation. For the first time serious consideration of legislation is underway. As a result, groups are beginning to develop their public positions. Meanwhile, businesses continue to feel increasing pressure to address the risks associated with climate change.

We are cooling. We are not warming. The warming you see out there, the supposed warming, and I am using my finger quotation marks here, is part of the cooling process. Greenland, which is now covered in ice, it was once called Greenland for a reason, right? Iceland, which is now green.

Skepticism among "Blue Dog" Democrats: As serious consideration of a cap and trade bill is now underway, conservative Democrats are questioning the timing and implementation of a cap and trade proposal. In a Wall Street Journal interview with U.S. Climate Action Partnership member, Fred Krupp, he minimized the concern a divide is occurring within the Democratic Party:

Recently I met with 27 House Blue Dog Democrats, alongside other members of USCAP including [GE boss] Jeffrey Immelt, [Shell’s] Marvin Odum, and [Duke Energy’s] James Rogers. What I heard is that they want to be involved in getting a climate bill right, and making it fair for consumers; I didn’t see a lack of engagement. Until now, there’d been no prospect of legislation. Now, the sorts of concerns are raised that naturally get raised when things could actually happen. This is part of the legislative dance, and that just began in earnest when President Obama called on Congress to deliver a climate bill.

Size of the Climate Bill May 2 or 3 Times Projected in the President's Budget- Jason Furman, deputy director of the National Economic Council, told Senate staffers in late February that the plan could raise two to three times as much as the official budget figures, or between $1.3 trillion and $1.9 trillion, the WSJ reports.

[In order to get projections that high] That leaves carbon-emissions permits that are simply more expensive than the lowish prices that have been bandied about so far. To make the White House math work, the government would have to sell the same number of permits at prices ranging from $20 to more than $40 a ton [compared to $10 to $14 per ton originally projected. For comparison the most recent RGGI auction, carbon was around $3 per ton]

Cap and Trade Means Jobs- Understanding the link between a struggling economy and the viability of cap and trade legislation, the Environmental Defense Fund has launched a new web site showing regulating carbon can translate into green jobs. The site contains maps of select states with push pins representing various companies that EDF argues would benefit from cap and trade legislation. It is no coincidence that EDF uses mainly coal states to highlight the potential for green job growth. www. lesscarbonmorejobs.org

Market Solutions Versus Top Down Regulation- The freight train that is greenhouse gas (GHG) regulation is on track and moving full steam ahead. I cannot repeat enough to those debating climate change legislation, if you are focusing only on whether to enact cap and trade legislation you are missing the 800 lbs gorilla in the room. GHG regulation is coming. The Supreme Court set the train in motion with Massachusetts v. EPA. No real debate should occur without examining the alternative of allowing Clean Air Act regulation of GHGs instead of a market based solution like cap and trade.

If you are like me you have noticed a lot more people talking about climate change in the last month. President Obama's cap and trade proposal has certainly garnered more attention on the subject. Many opponents tend to ask why we should be pursuing such a massive program in the middle of an economic crisis. Unfortunately, I have also had more conversations with individuals asserting global warming is a hoax or overblown.

Levin, six other Democrats and 26 Republicans are objecting to a Senate procedural budget reconciliation process that would limit debate and amendments to Obama’s proposed debate cap-and-trade legislation, according to the Detroit News.

As many have observed, the political debate in Congress may shape up to be less about political party and more about geography. Senators, whether Democrat or Republican, from coal states or manufacturing states will find it very difficult to support cap and trade legislation.

What is even more threatening to a cap and trade proposal is that the Republicans have yet to fully seize on their attack message- with the economy in shambles now is not the time to be enacting climate change legislation. Right now, Republicans are soft peddling opposition to cap and trade, as articulated in Reuters recently by Sen. Murkowski:

Congress will not be able to pass legislation capping carbon emissions in 2009 if the economy continues its downward slide, a key Republican senator said on Monday.

"If the economy is still where we are right now, I would suggest to you it's not happening this year," Senator Lisa Murkowski told reporters at a Platts Energy Podium.

Once the polling numbers show they can win the debate, you know they will ratchet up the heat...so to speak.

What does the challenge of passing carbon legislation mean? As discussed in prior posts, it means that regulation of greenhouse gases (GHGs) through the Clean Air Act will happen first and in a dramatic fashion. Many of those opposing carbon cap and trade legislation seem to ignore this reality.

EPA has already drafted final emission reporting rules for GHGs. Next month, EPA is likely to issue their draft endangerment finding. In addition, EPA will take additional action to regulate GHGs under the Clean Air Act. Massive litigation will follow all of these rulemaking efforts. More suits will be filed by environmental groups looking to use existing authority under the Clean Air Act to block new plants or reduce emissions.

Unfortunately, the command and control approach that will result from regulation under the Clean Air Act will be far more costly and will create great uncertainties. Cap and trade has consistently been shown to be more effective and a cheaper way of reducing emissions.

The clash between cap & trade and regulation under the Clean Air Act, was recently highlighted by a project titled "Breaking the logjam." This project involved N.Y. University School of Law and New York Law School and enlisted 40 environmental law experts across the ideological spectrum. The conclusion of the report was cap and trade is a far more effective means of addressing climate change:

Experience has shown the cap and trade approach to criteria pollutants can achieve cuts at lower cost than are achievable under the highly prescriptive and cumbersome regulatory method at the heart of the current statute [Clean Air Act]

In my mind, the debate cannot be framed in terms of either regulation or no regulation. There is no such option. There is certainly enough Congressional support for addressing climate change that any legislative proposal to amend the Clean Air Act to prevent regulation of GHGs will be unsuccessful.

Rather, the debate must be viewed as which method of regulation is the better option. When viewed in this manner, we should be debating the elements of the cap and trade legislation- offsets and auction v. allocation-not whether to pass such legislation.

The details of the EPA reporting rule may provide a glimpse into the structure of President Obama's Cap and Trade program. For example, the 25,000 mtCO2e and specifically named source categories may be used to determine which businesses are covered by the cap. It is also important to note, the coverage of the reporting rule contrasts with much lower threshold triggers used by other regulatory programs under the Clean Air Act.

All the other GHGs have higher potential to cause global warming. Therefore, as with other the European Union Trading System, a conversion ratio is applied to create carbon dioxide equivalents. For example, 1 ton of methane is equal to 20 tons of CO2. These conversion ratios are important to understand because they determine which businesses are covered by the reporting rule.

For example, a large agricultural operation will have significant emissions of methane. The facility will need to convert its methane emissions to CO2 equivalents to determine if it is a facility covered. [Note: most agricultural operations are exempted from coverage under the rule]

How did EPA pick the 25,000 mtCO2e threshold?

EPA considered thresholds of 1,000, 10,000, 25,000, and 100,000 mtCO2e/year when developing the proposal. For each threshold, EPA assessed the number of facilities that would be covered as well as the total amount of emissions that would be covered. These analyses suggested that at a threshold of 25,000 metric tons of mtCO2e/year, 13,000 facilities and 85-90% of total GHG emissions would be covered. At a threshold of 10,000 mtCO2e/year approximately 20,000 facilities and 86-91% of GHG emissions would be covered. EPA felt reducing the threshold increased costs for smaller businesses and would not result in a significantly larger inventory of emissions.

Are other facilities with lower than 25,000 mtCO2e required to report?

EPA also included "downstream" sources. Those facilities that produce fuel that when burned result in GHGs emissions. This producers include: coal, coal-based liquid fuels; petroleum products, natural gas and natural gas liquids; producers of industrial greenhouse gases as listed in the rule; and importers/exporters of 25,000 mtCO2e.

How will this affect small and medium sized businesses?

Using this threshold, EPA estimates this will capture 90% of GHG emissions and require 13,000 businesses to report. In rolling out its proposed rule, EPA tries to deflect criticism leveled by the U.S. Chamber and others that EPA GHG regulations will have a negative impact on small and medium sized businesses. EPA provides the following fact relative to the 25,000 threshold:

25,000 mtCO2e are equivalent to emissions from annual energy use of about 2,200 homes. It is also equivalent to just over 58,000 barrels of oil consumed or 131 railcars’ worth of coal.

This statistic does give you some perspective on the magnitude of the sources covered by the reporting rule. However, just because these larger sources are covered by the reporting rule does not necessarily mean that regulation of GHGs under the Clean Air Act would not capture much smaller sources. For example, the New Source Review permitting threshold for a major source is 100/250 tons of a pollutant.

What is the method for monitoring emissions?

EPA selected a combination of direct measurement and facility specific calculations as the general monitoring approach. Direct measurement will require Continuous Emission Monitors (CEMs) on some sources. Other sources will have to use emission calculations designed for that type of facility. EPA asserts that the emission calculations are similar to those used in other programs such as the Climate Registry or California's AB-32.

Consistency is an important issues. EPA estimates the cost to report will be around $13,000 per facility. This is an average which means it will be much higher for some facilities. Many companies have voluntarily begun measuring emissions under the Climate Registry or another approach. Other companies are covered by mandatory state programs like RGGI.

The ability to agree on a common method for measuring emissions is critical. It will reduce compliance costs and prevent criticism that there are inconsistencies in the various programs. For these reasons, the comments on this portion of the rule are critical.

After enactment of the Budget, the Administration will work expeditiously
with key stakeholders and Congress to develop an economy-wide emissions reduction program to reduce greenhouse gas emissions approximately 14 percent below 2005 levels by 2020, and approximately 83 percent below 2005 levels by 2050. This program will be implemented through a cap-and-trade system, a policy approach that dramatically reduced acid rain at much lower costs than the traditional Government regulations and mandates of the past.
Through a 100 percent auction to ensure that the biggest polluters do not enjoy windfall profits, this program will fund vital investments in a clean energy future totaling $150 billion over 10 years, starting in fiscal year 2012. The balance of the auction revenues will be returned to the people, especially vulnerable families, communities, and businesses to help the transition to a clean energy economy.

The budget blueprint Obama sent to Congress yesterday foresees revenue of $645.7 billion by 2019 from the sale of permits to polluters from 2012. Obama proposes to use the money raised to pay for other priorities, such as tax breaks for the lower and middle class. Another $150 billion will be used to help spur development of renewable energy.

Early reaction to Obama's plan has been mixed with most recognizing he will have an enormously tough road ahead to pass a Climate bill with the framework he is proposing.

100% Auction... how about 30%?- President Barack Obama may need to give away as much as 70 percent of greenhouse-gas emissions permits to win support for his cap-and-trade program, Merrill Lynch & Co said.

Obama team will be pragmatists on climate change- "Todd Stern, the Obama administration’s new top climate-change negotiator, wants to tamp down on the expectations. He talks tough and is all for the shift to a low-carbon economy, but he’s not an ideologue. And he may well be reflecting the White House’s pragmatism in the face of numerous challenges." Its hard to see the pragmatism in a 100% auction, very small offset proposal.

On February 18th another permit, Northern Michigan University Ripley Heating Plant, for a new coal facility was remanded by U.S. EPA's Environmental Board of Review. The Board remanded the permit because the State (the Michigan Department of Environmental Quality), in issuing the permit, failed to address whether CO2 was a regulated pollutant under the Clean Air Act. The most interesting aspect of the decision is that the Board apparently gave absolutely no weight to former EPA Administrator Johnson's Memo which said CO2 was not a "regulated pollutant" and therefore new permits need not consider BACT controls for CO2. Here is what the Board said on the issue:

For the reasons set forth in that decision (Deseret Power), we similarly remand the CO issue here, directing MDEQ, guided by our findings in Deseret, to undertake the same consideration whether the CAA’s “pollutant subject to regulation” language requires application of a BACT limit to CO emissions.

The permit had authorized Northern Michigan University (NMU) to construct a new circulating fluidized bed (“CFB”) boiler at the Ripley Heating Plant on its campus in Marquette, Michigan. As permitted, the CFB boiler will function as a cogeneration unit that provides both electrical power and heat to NMU’s facilities through the burning of wood, coal, and natural gas

Another interesting aspect of the decision was the Board also remanded the BACT analysis for the SO2 limit. The permit called for a mix of fuels- mainly wood and coal. The Board found there was not enough information provided to justify the limited amount of wood which would lower SO2 emissions. The Board also questioned the fuel choice relative to coal. It said the MDEQ needed to provide more information as to why lower sulfur coal was not required to lower SO2 emissions.

The BACT requirements for fuel choice are interesting. For instance, once (not if) CO2 is regulated would BACT require a coal and biomass mix which can lower emissions of CO2? This could be very good news for biomass producers who blend biomass with coal to form briquettes or pellets.

There has been major developments as a result of litigation, policy, rulemaking and legislation in the last few weeks relating to climate change and coal fired power plants. Some changes are a result of outstanding litigation. However, the most significant changes are indicative of the sea change that is occurring at the federal level under the Obama Administration relative to climate change.

Here is a review:

EPA will not regulate mercury by cap and trade- EPA Administrator Jackson announced today that the Agency will be moving forward with rulemaking to regulate mercury emissions from coal plants. "President Obama's EPA does intend to regulate mercury under section 112 of the Clean Air Act," said Jackson. Acting solicitor general Edwin S. Kneedler will drop the prior appeal of the decision in New Jersey v. EPA which struck down the Bush Administration cap and trade proposal for regulating mercury.

NEPA reviews of climate change impact required for oversees projects- The Obama Administration has settled an outstanding lawsuit which sought to compel NEPA reviews of climate change impacts for oversees projects financed with federal money. Western cities and environmental groups alleged that Export-Import Bank of the United States and the Overseas Private Investment Corporation illegally provided more than $32 billion in financing and insurance to fossil fuel projects over 10 years without assessing whether the projects contributed to global warming or impacted the U.S. environment, as they were required to do under the National Environmental Policy Act (NEPA). The settlement will require NEPA reviews and will also require future reductions of greenhouse gases.

EPA begins review of California Waiver Decision- In a press release today, EPA announced they are beginning the review of the California waiver request to regulate greenhouse gas emissions from vehicles. I think this quote from the EPA press release pretty much tells you what the outcome will be - "EPA believes that there are significant issues regarding the agency’s denial of the waiver. The denial was a substantial departure from EPA’s longstanding interpretation of the Clean Air Act’s waiver provisions. "

Some priorities Ms. Jackson is very upfront about, such as addressing Climate Change (which notably was identified as the number 1 priority in her memo). Other policy perspectives are a little less straightforward, but inferences can be made. Here are my take aways from the memo.

Climate Change is a major priority- The President made reference to it in his inaugural speech. It is no mistake that its the first bullet on EPA-designate Jackson's list of priorities. Notably, she includes the following statement: "As Congress does its work, we will move ahead to comply with the Supreme Court's decision recognizing Pea's obligation to address climate change under the Clean Air Act" STAY TUNED ON THIS ONE>>>

Science will be at the forefront- Many environmental groups felt that the Bush Administration put science secondary to their end regulatory goals. The memo is a clear statement that this will change. What could be the impact? For one, look for even stronger federal air quality standards (NAAQS) for ozone and fine particles.

Resurgence in Environmental Justice- A very thorny issue and one difficult to address through regulation. However, the memo mentions making "people disproportionately impacted by pollution" a priority. Perhaps they will try to tackle this more aggressively.

CAIR- I may be out on a limb on this one. In the "improving air quality" priority, Jackson states "we will plug the gaps in our regulatory system as science and the law demand." I think this is a vague reference to a much stronger CAIR program.

Brownfield Redevelopment- U.S. EPA may put even more emphasis on brownfield programs as a means to accelerate clean up of contaminated sites. Jackson was criticized in New Jersey for the slow clean ups. I think the statement -"turning these blighted properties into productive parcels and reducing threats to human health and the environment means jobs and investment in our land" -can't be anything other than a reference to a strong brownfield program.

Money for the Great Lakes?- In the memo, Jackson says the "Agency will make robust use of our authority to restore threatened treasures such as the Great Lakes and the Chesapeake Bay." I am intrigued at the term "robust use of our authority" in connection with the Great Lakes. Is this a reference to enforcement rather than the Great Lakes Restoration Plan?

Don't underestimate the amount of change coming- President Obama's buzz word was change. I don't think there is any area that is about to see more change than environmental regulation in the next four years. Fasten your seat belts...

However, the decision and implications are somewhat surprising. The Court declared that emissions from four of eleven TVA power plants in upwind states created a public nuisance in the State of North Carolina. Even though these sources apparently comply with environmental permits and regulations, the Court ordered hundreds of millions of dollars in new pollution control equipment on those plants.

Downwind states suing upwind states over coal power plant pollution is nothing new. The Northeastern and Mid-Atlantic States have sued Midwestern and Southern States over pollution under a number of theories.

They successfully participated in New Source Review enforcement cases with U.S. EPA.

They filed Section 126 petitions under the Clean Air Act. Those petitions were later resolved by U.S. EPA by creating the Clean Air Interstate Rule (CAIR)- a cap and trade pollution control program.

They have sought new federal legislation tightening emission standards on coal-fired power plants

What makes this suit so different is that the State of North Carolina went outside the typical Clean Air Act tool box in asserting its claims. Instead the State relied upon common law theories. The decision will certainly bring a waive of new rounds of litigation. Especially with the remand of CAIR after the successful challenge by North Carolina.

Here are some of the significant implications of this decision.

1. The Court found that significant health effects occur as a result of exposure to pollution at levels even below the National Ambient Air Quality Standards (NAAQS) for PM 2.5 and Ozone. The Courts said:

"After reviewing the totality of evidence, the Court is convinced that exposure to PM 2.5-even at or below the NAAQS of 15 ug/m3- results in adverse cardiopulmonary effects, including increased or exacerbated asthma and chronic bronchitis...these negative but non-fatal health effects result in numerous social and economic harms to North Carolinians, including lost school and work days..."

2. The Court found that sources in upwind states can still have significant impacts on a downwind state’s air quality. However, in this case, the Court drew the line at distance of 100 miles. TVA plants within 100 miles (4 plants) were deemed a nuisance and plants outside 100 miles (7 plants) were not.

3. The Court created a new definition of “significant contribution.” TVA plants that were contributing 3% of the emission responsible for PM 2.5 pollution in North Carolina and roughly 5% of the ozone problem were deemed to significantly contributing. On that basis, these plants (ones roughly within 100 miles) were deemed a nuisance. Sources that contributed less than 1% were deemed not a nuisance.

4. The Court required installation of SCRs and scrubbers on a number of units because those units were contributing to the nuisance.

5. Even though these plants were apparently in compliance with all federal and state environmental permits and regulations, they will be putting on additional controls.

6. The Court included emission rates for each plant in a spreadsheet in the opinion. However, the decision is somewhat vague as to whether these are simply expected emissions post controls or in fact legally enforceable limits.

7. From a legal perspective, I found it interesting that a federal judge in North Carolina found sources in other states to be causing a nuisance by applying the State nuisance law from Alabama, Kentucky and Tennessee where the sources are located.

The Court decided to remand the rule to U.S. EPA so it can fix the rules "fatal flaws" identified in its earlier decision. This decision has the effect of preserving the CAIR rule in the interim while EPA overhauls the rule. The Court also rejected the request by some to establish a firm deadline by which EPA must re-issue the rule.

Here is how the Court explained the rationale for its decision:

Here, we are convinced that, notwithstanding the relative
flaws of CAIR, allowing CAIR to remain in effect until it is
replaced by a rule consistent with our opinion would at least
temporarily preserve the environmental values covered by
CAIR. Accordingly, a remand without vacatur is appropriate in
this case...

We explained that vacatur was appropriate
because of the depth of CAIR’s flaws, the integral nature of the
rule, and because other statutory and regulatory measures would
mitigate the disruption caused by vacating the rule. Id.
However, on rehearing, EPA, petitioners, and amici states point
to serious implications that our previous remedy analysis,
including our consideration of mitigation measures, did not
adequately take into account. The parties’ persuasive
demonstration, extending beyond short-term health benefits to
impacts on planning by states and industry with respect to
interference with the states’ ability to meet deadlines for
attaining national ambient air quality standards for PM2.5 and
8-hour ozone, shows that the rule has become so intertwined
with the regulatory scheme that its vacatur would sacrifice clear
benefits to public health and the environment while EPA fixes
the rule.

While not addressing the issue, the Court rejected its request for reconsideration of what EPA identified as key issues. One such issue was whether EPA has the authority to adjust the value of Acid Rain allowances under CAIR.

While this decision is very good news for EPA and the States who are trying to plan for meeting air quality standards, it still leave a tremendous amount of uncertainty. The Court is not reconsidering any of the "fatal flaws" it identified with CAIR, which were numerous. The rule that will emerge after being fixed by EPA will look vastly different than before.

Now utilities will be left with making key decisions about the use of allowances and construction of new controls without the benefit of knowing what the new CAIR rule will look like. While the picture got a little clearer today, there is still a whole bunch of uncertainty.

EPA's decision to create a cap and trade program for mercury was very controversial. Those opposed said cap and trade was not meant to control toxic pollutants like mercury. In response, a number of states rejected the CAMR rule and adopted state programs that established control requirements for every coal plant within their borders.

While the federal court declared CAMR illegal, it also made an important determination as it relates to control of HAPs from coal plants. In order to create the cap and trade program, the Bush Administration had to undue the efforts of the Clinton Administration to establish facility specific control standards for coal plants under Section 112 of the Clean Air Act.

In December 2000, the Clinton EPA decided to list electric generating units (EGUs) under section 112. By listing this source category under Section 112, all existing and new plants must meet Maximum Available Control Technology Standards (MACT) for controlling emissions of HAPs. MACT is emission controls equal to the "average emission limitation achieved by the best performing 12 percent of the existing sources."

In order to create its cap and trade program, the Bush Administration tried to de-list EGUs as a source category regulated under Section 112. The federal court in New Jersey v. EPA found this action to be illegal. This means that EPA must move forward with rules establishing a MACT standard for EGUs. To date, EPA has failed to take such action. As reported in the Charleston Gazette this week, groups have sued EPA to compel such action.

A coalition of environmental groups has filed a lawsuit trying to force the federal government to comply with a 6-year-old mandate to reduce toxic chemical emissions from coal-fired power plants.

The suit, filed Thursday in federal court in Washington, asks for a court order requiring the U.S. Environmental Protection Agency to set limits for mercury and dozens of other hazardous air pollutants.

The new lawsuit follows a major decision by a federal court in North Carolina (Southern Alliance for Clean Energy v. Duke) that invalidated a permit for construction of a new coal plant because the permit failed to show compliance with MACT for HAPs. The main issue in the case was whether the MACT standards apply to the on-going construction of a coal plant following the New Jersey decision. Notably, the Court ruled that MACT did apply even though the permit was issued and construction had already began on the new source.

While mercury and other HAPs won't be controlled fromexisting plantsuntil EPA finalizes its MACT standards for EGUs, at least one federal court has said new plants must meet the yet to be established standard. This presents another avenue for environmentalists to challenge air permits for coal plants, even permits issued prior to the February 8, 2008 decision.

President Elect Obama has prided himself on appointing a mix of opinions in his cabinet and senior advisors. For example, his National Security team is made up a former political rival and a Republican from the Bush Administration. Obama has said he studied history and identified a possible issue in past presidencies is not fostering a diverse mix of opinions to debate policy. Here is what the President Elect said after making his National Security appointments:

“One of the dangers in a White House, based on my reading of history, is that you get wrapped up in groupthink, and everybody agrees with everything, and there's no discussion and there are not dissenting views,” Obama said, voicing a frequent criticism by some senior Bush-administration alumni.
“So I'm going to be welcoming a vigorous debate inside the White House. But I understand, I will be setting policy as president.

The diversity that was plainly evident in his Naitonal Security team seems to be missing on his Green Team. Carol Browner as Climate Czar and past senior managers at EPA will fill the other important environmental posts. The announced appointments have met with a mix of reviews. The USA Today praised the choice in an article title"Obama's Dream Green Team is Warmly Received."

One is a Nobel Prize winner overseeing research of alternative energy. The three others all have one thing in common: experience working for the Environmental Protection Agency...

"This is clearly a green dream team," said Gene Karpinski, head of the League of Conservation Voters, an environmental group. "These people have shown they can get the job done."

Obama has mustered an "impressive team of experienced and capable leaders," said Tom Kuhn, president of the Edison Electric Institute, a group representing electric companies.

The EPA long ago became the government arm of the environment lobby, but Ms. Browner was especially political. During her EPA salad days, she put out air-pollution standards that even the agency itself said would have no measurable impact on public health, purely as antibusiness punishment. She forced GE to dredge the Hudson River of PCBs that posed no threat to the public. Ms. Browner also rewrote a law called New Source Review so that power plants, refineries and other industries were always breaking the particulate emissions rules....

As for the "team of rivals" hype, the rest of Mr. Obama's energy list is heavy with Ms. Browner's acolytes. Lisa Jackson, for 16 years a top EPA enforcement officer, will now run that agency. At the White House Council on Environmental Quality will be Nancy Sutley, who was Ms. Browner's special assistant at EPA.

The Washington Post noted the commonality in the appointments in their piece covering the appointments titled "Seasoned Regulators to Lead Obama Environment Program." :

Word of their appointment was greeted enthusiastically yesterday by some environmental groups. The League of Conservation Voters called the group a "green dream team."

Industry groups were more cautious. At the U.S. Chamber of Commerce, Vice President William Kovacs said the group worried that the new officials would use their power to limit greenhouse-gas emissions and impose painful new costs on energy use.

"I think that they could be aggressive, and we're hoping that they're really going to look at the circumstances" of the economic downturn, Kovacs said. "That is our biggest single concern, because literally all three of them have a regulatory bent."

Regardless of your opinions of any of appointments as individuals, it is hard to see a wide divergence of opinion emerging. While there is no doubt seasoned veterans are needed to develop and implement a game changer like climate change legislation, I agree with the President elect...a diversity of opinion is a valuable asset that can improve decision making.

Is the Court showing signs that it may have gone too far is throwing out CAIR? After EPA filed a request for rehearing, a hopeful sign emerged last month when the Court asked the parties challenging CAIR to respond to two questions:

Does any party really want the entire rule thrown out (vacatur)?

Should the Court stay the effectiveness of its decision to throw out the rule until EPA fixes and re-issues a new rule addressing the Court's issues?

In response, twenty-two (22) states, including North Carolina, told the Court they don't want the rule thrown out. The States requested the Court to stay the effectiveness of its decision to allow EPA to fix the rule. However, North Carolina was concerned with how much time EPA would have to fix the rule-it opposed an indefinite stay. Rather, N.C. proposed a deadline of July 2009 after which the stay would end.

Regulatory certainty is critically important, and granting rehearing or staying the mandate would require CAIR states to immediately implement, and affected sources to immediately comply with a rule the Court has declared contains "more than several fatal flaws."

The Utilities opposing remand or a stay ask a valid question- What portion of a "fundamentally flawed" program are going to remain after EPA fixes the rule. EPA has said it will take 2-3 years to fix CAIR. The Utilities argue why should they be forced to comply with provisions of the rule that Court has said are fundamentally flawed for the next several years.

Principally, U.S. EPA wants rehearing on the Court's decision that EPA does not have the authority to adjust Title IV (acid rain) allowance under the CAIR program. Without the authority, EPA argues it cannot create a program that will impose greater reductions of SO2 emissions. This would mean the less stringent caps under the old Acid Rain Program will remain.

EPA says this will also impact the emission reductions achieved during a potential stay. Without clear authority to adjust Acid Rain caps and allowances, Utilities will have no incentive to hold banked allowances for future compliance. This is because Utilities will not anticipate a stronger program will emerge after EPA fixes the rule. Rather, Utilities will simply use up the allowances during the stay and emission reductions will not occur.

EPA raises an interesting issue- Even if a stay is granted there will be tremendous uncertainty as to what the Utilities will do with allowances during the stay. While EPA makes a valid point, they may have ended the possibility of a stay if the Court is unwilling to reconsider its position that the rule is fundamentally flawed.

Given all the posturing by the Parties, it will be interesting to see what course of action the Court takes in response.

There appears to be growing awareness that the CAIR decision has major implications beyond just the Utilities. For instance, what about upcoming deadlines for attaining federal air quality standards (NAAQS)? Without the CAIR SO2 reductions States will likely not be able to comply in time. Should the State's be punished for EPA's failure to develop a legally enforceable program?

In yesterday's U.S. News and World Report there was an article covering the uncertainty that swirls around the future of clean air post CAIR.

Five months after a federal court struck down the Bush administration's top program aimed at curbing air pollution, the fate of air quality regulation—and, therefore, air quality—in much of the country is increasingly uncertain, if not imperiled.

I was interviewed for the story and was able to point out that the States can't fix air quality issues on their own. Federal help through programs like CAIR is needed to address what is a regional issue, not a local issue.

"In the case of fine-particulate pollution, there is a huge regional soup of it," says Joseph Koncelik, an Ohio-based environmental lawyer and the former Ohio EPA director. "So, it's somewhat ineffective if states are working on their own, just trying to control a few factories in their jurisdiction."

If the Court doesn't grant the stay and issues its mandate effectively throwing out CAIR, will EPA still hold the States accountable for the 2010 deadline to meet the fine particle standard (PM 2.5)?

As reported by Platts, on October 21st the D.C. Circuit Court of Appeals asked whether the parties involved in the lawsuits that led to vacatur of the Clean Air Interstate Rule (CAIR) want the entire rule to be thrown out or to be kept in place until U.S. EPA revises the rule.

The US Court of Appeals for the District of Columbia Circuit on Tuesday
ordered petitioners -- which include utilities Duke Energy and Entergy -- to
respond within 15 days to its inquiry.

It is a move CAIR supporters see as a hopeful sign.

"We see it as a sign that [the court is] working through the reasoning of
our position and, hopefully, will make the right decision" and keep CAIR in
place, said EPA spokesman Jonathan Shradar.

Asking the petitioners whether they want the entire rule thrown out or a
stay of the court mandate indicates the DC Circuit is "taking our petition
seriously," he added.

If the DC Circuit stays its mandate, CAIR could stay in place until EPA
puts in place a revised rule.

This puts the Utilities in an interesting position. EPA has indicated that CAIR would need a significant rewrite which would include weakening protections that were provided to the Utilities under the original rule. The weakening would likely include removal of the shield that EPA constructed that protected the Utilities from claims that interstate transport of pollution was not adequately addressed by CAIR.

Given the 15 day deadline, the briefs should have been filed. It will be very interesting to how the Utilities like to gamble. Would they prefer the rule to be thrown out and take their chances a new program is developed that is stronger? Would the prefer maintaining at least the first phase of CAIR to give them some certainty in the allowance markets and be able to plan for new pollution controls?

I mentioned in my post discussing LADCO air quality meeting that I would put up the most relevant slides or graphics from all the presentation over the two days in Chicago. I think I can pretty much boil it down to two slides.

This slide was put together by U.S. EPA when meeting to discuss their support of a Legislative fix to reinstate CAIR. As discussed, no legislative fix appears possible at least in the short run.

The bar chart shows the reductions of existing SO2 emissions based up various legislative fixes. The bar to the far left is emissions in 2005. The short series of bars represents full reinstatement of Phase I (2009) and Phase II (2015) of CAIR. Then we go through no fix, 2 year temporary fix, 4 year temporary fix, and permanent reinstatement of only Phase I.

Okay, so this is a great visual for the massive reductions in SO2 expected as a result of CAIR. With no legislative fix and successful appeal of the Court's decision vacating CAIR unlikely, looks like we are at the "no fix" point on the graph.

But what does this mean to air quality? While the presentations from the States all indicate attainment of the 1997 ozone standard (.85 ppm) appears likely, its a much different story for P.M. 2.5 (fine particles).

This is the latest modeling of air quality in the Midwest without CAIR. The map on the right shows no CAIR. The map on the left with CAIR. The more color dots the more area not meeting U.S. EPA's PM 2.5 standard.

The chart below provides the overall scorecard. We go from only 3 areas in the Midwest not meeting the standards, to a total of 20 area.

Furthermore, all of the presentations discussed that PM 2.5 (fine particle) pollution is regional in nature. Which means the states will find it probably impossible to attain the standard without regional reductions similar to CAIR's reductions from power plants.

With more areas not attaining, more states will be forced to consider much costly controls on existing businesses. In addition, areas that don't meet U.S. EPA's air quality standard find it more difficult to attract new business or plant expansions in their areas. Not good news for the Midwest during these tough economic times.

Notwithstanding EPA's solicitation of public comments, the buzz really kicked in following a recent statement by Jason Grumet in a Bloomberg interview that an Obama Administration would regulate greenhouse gases under existing authority in the Clean Air Act if Congress fails to act within 18 months.

In an interview last week with Bloomberg, Mr. Grumet said that come January the Environmental Protection Agency "would initiate those rulemakings" that classify carbon as a dangerous pollutant under current clean air laws. That move would impose new regulation and taxes across the entire economy, something that is usually the purview of Congress. Mr. Grumet warned that "in the absence of Congressional action" 18 months after Mr. Obama's inauguration, the EPA would move ahead with its own unilateral carbon crackdown anyway.

Left leaning blogs like Gristmill have come out in support of the idea:

I've talked to a few people behind the scenes who are big fans of this approach. One of its primary virtues is that it allows the EPA to build on all the great work that states have done, knitting together and rationalizing their various efforts. Another is that it can be done quickly, without a Congressional battle, enabling the U.S. to go into the 2009 Copenhagen climate talks with a good-faith effort in hand.

The Clean Air Act is already a mature, flexible and successful law designed to integrate the work of all economic sectors and all levels of government. Honed in three stages of effort – the original lawmaking, and two major rounds of amendments – it is a functioning national regulatory structure that spans decades of deliberation, compromise and practice.

By applying the Clean Air Act, the next president can stand on the shoulders of legal and regulatory precedent. He can adopt an executive branch strategy to complement the next round of legislative efforts, now also in preparation. He can lead climate policy development through existing authority, and ensure that the US has a strong position going in to the next round of international climate negotiations. Action in the first hundred days can set the stage for genuine US re-engagement in the international climate effort in
Copenhagen in 2009.

Massachusetts v. EPA,which said greenhouse gases are a "pollutant" under the Clean Air Act, sets in motion inevitable regulation under the Clean Air Act. U.S. EPA's position is that the Clean Air Act is not applicable to GHGs until it moves forward with actual regulatory standards for their control or reduction. But that is only a matter of time. Even if EPA continues to delay action, suits challenging that delay will be successful, probably way before the 18 month time frame established by Mr. Grumet.

I participated today in a Midwest Air Quality Workshop in Chicago. At the workshop, Bill Harnett from U.S. EPA's Office of Air Quality Planning and Strategy (OAQPS) gave an interesting presentation regarding U.S. EPA's reaction to the vacatur of CAIR by the D.C. Circuit Court of Appeals. Here are a couple of the key issues discussed or observations made:

Chances of Rehearing Appear Slim- U.S. EPA is not very optimistic about their chances to get rehearing from the D.C. Circuit. Apparently only 5 of the 10 justices who sit on the Court do not recuse themselves from U.S. EPA's cases involving the utilities. This means that instead of a full panel of justices, U.S. EPA is requesting reconsideration to only five justices, three of which decided to vacate CAIR already. This means U.S. EPA will have to get one of the Justices to change their previous opinion just to get rehearing...an outcome that does not appear likely.

Even if Rehearing is Granted the Best Hope is Restoring Only a Portion of CAIR- As discussed in my prior post on the brief U.S. EPA filed for rehearing, U.S. EPA seems to have thrown in the towel already on getting all of CAIR restored- meaning the second phase of reductions in 2015 are out of the picture. Even if U.S. EPA gets a rehearing it is already saying the best possible outcome will be to restore the first phase (2009) of CAIR reductions.

No Short Term Legislative Fix- This was apparent with Congress going into recess for the elections. Time simply ran out on a quick fix that could have restored the first phase of the CAIR reductions in 2009. The ramifications are significant because, as discussed below, any path forward will involve at least a two or three year process.

A Fix is at least 2-3 Years Away- While U.S. EPA is already evaluating options for a new federal rule and also hoping for legislation, either approach will be lengthy. U.S. EPA is going to have to wait until a new administration comes into office. Appointments won't happen until at least the Spring. This means a new rule proposal or even rules following legislation won't happen until the summer of 2009 at the earliest. However, even after the rule is proposed this just starts the long rulemaking process. Therefore, U.S. EPA is saying a final rule is 2-3 years away and reductions may be 4-5 years away.

U.S. EPA Wants to Develop a "Safe" or "Bullet Proof" Rule- It is clear U.S. EPA does not want to risk losing the entire CAIR program a second time. To try an ensure that won't happen, U.S. EPA says they will push for a rule that addresses the issues raised by the Court. What this means exactly is unclear, but I doubt the utilities will be happy with the outcome. One option discussed was to craft a federal rule that does not "address" interstate transport, but only "reduces" transport. Under CAIR, U.S. EPA said the states didn't have to do anything more to "address" transport because CAIR solved interstate transport issues. In a new rule, U.S. EPA says they won't go that far leaving additional reductions to solve interstate transport up to the States.

How? U.S. EPA would leave it up to the states to certify in the State Implementation Plans (SIPs) that they have reduced emissions from sources in the State to such a degree they addressed all transport issues. This helps U.S. EPA because if one State's finding that they addressed interstate transport is overturned by the Courts the whole federal rule does not crumble.

For Trading to Survive U.S. EPA Can't Solve Transport, Some Reductions Will Come From the States- This builds upon the notion U.S. EPA will only strive to "reduce" transport and not "address" it . A federal rule that solves interstate transport could not include a cap and trade component. A principle reason the Court vacated CAIR was because with a cap and trade program there were no assurance reductions would occur in any given state. All the sources in a state could satisfy their obligations by purchasing allowances and avoiding controls. As a result, the Court said U.S. EPA illegally concluded in the CAIR rulemaking that it solved interstate transport of emissions from power plants.

Without CAIR State's will attain Ozone but not PM 2.5 - Each of the five LADCO States (Ohio, Indiana, Illinois, Wisconsin and Michigan) gave presentations on their air quality plans. All of the State's a planning to restore the NOx SIP Call in response to the CAIR decision. From the reductions under the NOx SIP Call all the states said they can attain the 1997 ozone standard.

However, without CAIR, attaining the fine particulate (PM 2.5) standard is nearly impossible. CAIR brought huge reductions in SO2 that will be lost without CAIR. LADCO modeling shows we go from 3 to 20 monitors in the Midwest reading nonattainment with the P.M. 2.5 standard without CAIR by 2009. Unless the States get very aggressive and proceed with old command and control enforcement/permitting against these sources it appears unlikely they can get enough reductions to attain the P.M 2.5 standard by their 2010 deadline.

(Note: Once the visuals from the various presentations are available next week I will post the best illustrations of the issues I have discussed above)

EPA elected to not seek review of the Court's holding that the 2015 deadline for Phase II reductions is unlawful because it is inconsistent with the shorter compliance deadlines for ozone and p.m. 2.5 contained in the Clean Air Act. The Court held EPA must require reductions as "expeditiously as practical" but no later than the deadlines established in the Clean Air Act (typically 2010). In the Court's words:

EPA did not make any effort to harmonize CAIR's Phase Two deadline for upwind contributors to eliminate their significant contribution with the attainment deadlines for downwind areas North Carolina v. EPA slip op. at 25

EPA's concession on the Phase Two deadline runs counter to the Bush Administration's position that a legislative fix of CAIR must preserve the entire program. To the extent EPA's concedes this point in its rehearing is somewhat puzzling as it was unnecessary at this stage of legal maneuvering. Perhaps this concession paves the way for a Congressional compromise over a short term legislative fix that preserves Phase I of the program. Certainly this concession means a rewrite of CAIR that includes more aggressive reductions seems inevitable.

EPA's Arguments in Support of Rehearing

EPA's brief appears to try and lay a guilt trip on the Court as its justification for a rehearing. EPA rightfully points out the major benefits of CAIR that will be lost if at least Phase I of the program is not preserved:

Vacatur will also destroy or reduce the value of banked allowances that companies generated through early emission reductions...6.9 million tons of banked Title IV allowances have lost over three billion dollars in value [since the Court's decision]

There is no doubt the courts decision to throw out the CAIR program has resulted in chaos both in the trading markets and with State's struggling to reach attainment with federal air quality standards. We will see if the Court agrees that these dire consequences satisfy the standard for review that the matter involve a question of "exceptional importance."

As a second basis justifying review of the decision, EPA argues that the Court has been inconsistent in its review of the NOx SIP Call and CAIR. The EPA argues the Court previously upheld the NOx SIP Call in Michigan v. EPA and CAIR uses the "same fundamental approach approved in Michigan." Both air pollution control programs use economic factors to determine the amount of contribution to downwind state nonattainment upwind states must eliminate. The economic factor being "highly cost effective controls."

This is the crux of the legal issue and has significant implications for the design of any cap and trade program to control air pollution. Does the Clean Air Act call for elimination of contribution to downwind air quality issues based upon cost of controls or does it require reductions based upon a State's actual contribution to downwind nonattainment? If it is ultimately decided that actual contribution must be eliminated, it may prove very difficult to craft a valid cap and trade program without new legislative authority.

EPA's strategy to argue inconsistency appears pretty risky given the fact the Court raises questions regarding legality of the NOx SIP Call. Specifically, the Court states: "In Michigan we never passed on the lawfulness of the NOx SIP Call's trading program." The Court's decision appears to suggest it would have thrown out the NOx SIP Call as well if proper challenges had been made.

The EPA appears to face a steep climb to ultimately win its appeal. The Court was unanimous in its finding that basing required reductions on cost effective controls does not comply with the Clean Air Act.

What's Next For CAIR?

Through legal maneuvering, U.S. EPA can effectively delay the effectiveness of the Court's decision to vacate CAIR. The rehearing petition will likely delay it for a couple months while the Court considers the petition including allowing comment by other parties. Even if the rehearing is denied, which appears likely given the original decision was unanimous, U.S. EPA can file a motion to stay the effectiveness of the decision while it seeks appeal to the Supreme Court. By Court rules a stay, if granted or not challenged by the other parties, is good for 90 days.

While EPA delays the effect of the Court's vacatur of the program, efforts will focus on a legislative fix that can preserve at least the immediate future of the program. However, time is running out on this "quick fix" option as Congress adjourns for the election.

The game of chicken centers around whether the entire program should be restored, meaning reductions in Phase I set to take effect in 2009/2010 and Phase II which is to take effect 2015. The White House insists on both Phase I and Phase II. (proposed CAIR legislation) Senate Democrats, who have long been unhappy with the strength of the CAIR program are talking like they are only willing to put in place Phase I and then work on long term legislation for a stronger program.

President George W. Bush is "pushing for a full codification of CAIR," Carper told reporters. "That just ain't gonna happen. I think they may not be able to get what they want, but they can get what we all need."

But the White House has allies in the U.S. Senate. In a sign of the ongoing standoff, Sen. George Voinovich, R-Ohio, and Sen. James Inhofe, R-Okla., introduced a bill Thursday that would restore the full program instead of just the first phase.

"Options to quickly reinstate Phase I CAIR followed by tighter legislation do not save as many lives as the full CAIR fix until eight to 20 years from now; that means 6,500 to 41,000 more lives will be lost mostly in the next three to six years," according to a statement released by the lawmakers.

With only a few week before Congress is set to adjourn, there does not appear to be much time to resolve the drama. With so much at stake and the chaos that will ensue if no type of fix is adopted, its hard to believe no action will be taken. But as long as the White House insists on reinstatement of the whole program it appears likely there will be no resolution. The Eastern State, Democrats, Environmental Groups and even some of the Utilities believe too strongly CAIR is a weak program. If this was not the case, Congress would have passed Clear Skies-the legislative precursor to CAIR.

As reported in Platts, the Court of Appeals has granted US EPA until September 24th to determine whether to pursue rehearing of the ruling that struck down the Clean Air Interstate Rule (CAIR).

The US Circuit Court of Appeals for the District of Columbia announced
....it was giving EPA more time to file any petition for a rehearing,
which it can seek either before the same three judges or before the full
six-judge court.

The court would seek comments from other parties on any government
petition, giving them up to 30 days, before making a decision, Walke added.

The full effect of the Court's decision takes place on issuance of its "mandate" which effectively throws out the program. The Court of Appeals typically issues its mandate 7 days after the time period for appeal expires. So earliest the full decision would likely take effect is October 1st.

EPA could file a motion to stay the effectiveness of the mandate while it seeks appeal. If no one opposes the motion the stay is effective for 90 days. If the motion to stay is granted, then it will continue while EPA seeks review in front of the Supreme Court. So, EPA through legal maneuvering can try and delay the inevitable.

Rehearing still appears unlikely as does any Congressional action to provide legal support for CAIR. Also, the decision to seek more time will keep EPA silent on many aspects how it proposes to deal with CAIR decision. EPA traditionally provide great deference to the Court while determining whether to seek an appeal. An information vacuum is not the best thing right now for those struggling to understand how to effectively address the many ramifications of the Court's decision.

MSNBC reported today that the Interior Department has proposed changes to the rules governing required reviews under the Endangered Species Act (ESA). From the news report is appears the two most significant proposed changes are:

Removal of the requirement to "consult" with Fish and Wildlife or other federal experts as part of the required review under Section 7 of the ESA. The proposed rules would allow federal agencies on their own, without consultation with sister federal agencies, to determine if project will have an impact on endangered species. To give you an idea of the breadth of projects being reviewed, the article states that Fish and Wildlife performed 300,000 consultations between 1998 and 2002.

Prevent the ESA to be used as tool to regulate greenhouse gases. This change was proposed after the Department of Interior proposed listing the polar bear as a "threatened" species. When the listing action was announced, Secretary Kempthorne clarified that the Department of the Interior (DOI) intends to act “to make certain the ESA isn’t abused to make global warming policies.” Today's announcement appears to be the action referenced by Secretary Kempthorne. It would bar federal agencies from assessing the emissions from projects that contribute to global warming and the corollary effect on species and habitats.

Section 7 of the ESA required federal agencies to consult with FWS (or other federal agencies) to ensure that any action they authorize through permitting or other means are not likely to jeopardize the continued existence of any listed species or result in the destruction or adverse modification of designated critical habitat. Some developers have complained that Section 7 results in long delays and unnecessary expenses associated with projects.

The proposal to overhaul the Section 7 process is controversial and will be challenged if it moves forward. On its website, the Department of Interior characterizes the proposal as "narrow changes" to the ESA.. Whether you support ending the consultation process or not, it is simply not accurate to describe it this a narrow change. More importantly, the proposal and surrounding controversy detracts from the legitimate concern over the use of the ESA to regulate greenhouse gas emissions.

The real issue is taking steps necessary to prevent the use of a myriad of federal and state regulations to leverage reviews of an individual project's contribution to global warming. Global warming by its very nature is a global issue. Unlike other pollutants, emission of greenhouse gases themselves do not have local impacts. The impacts stem from the overall increase in temperature associated with the accumulation of gases in the atmosphere.

The best way to address global warming is through comprehensive federal legislation establishing a cap and trade program that lowers emissions in a cost effective manner. Use of the ESA or portions of the Clean Air Act to combat global warming is like fitting round holes with square pegs. Unfortunately, the Department of Interior actions and announcement detracts from this important policy debate.

Surprised? I was after hearing the old reports of China building a new coal plant once a week. China has long been the favorite scapegoat for those arguing the United States shouldn't address climate change without their participation. But it appears China may be changing direction.

Here are some of the fun (and surprising) facts reported in the Study:

China leads the world in installed renewable capacity at 152 gigawatts

Approximately 820 solar PV were produced in China in 2007, second only to Japan

It is the leading world exporter of wind turbines

China investments in renewable energy as a percentage of GDP are almost equal to Germany's, the world leader

China's energy efficiency standards for cars is 40% higher than in the United States

China is the third largest producer of ethanol

Clearly, the goal of the Climate Group was to produce a study to combat the arguments raised in the United States that support inaction on climate change without India or China. However, one statistic highlighted in the Study deserves some additional discussion.

In 2007, China emitted 5.1 tons of CO2 per capita compared to 19.4 tons for the United States. While the United States per capita number justifies action, so does the potential for China to grow its emissions.

China has 1.2 billion people compared to the United States 300 million. China has already overtaken the US in total emissions with 1/3 of the emissions per capita because it has four times more people. Without mandatory caps, what will China's emissions be once 1/2 their population drives cars, purchases more of latest electronics, and have more income to travel?

Substantial health benefits will be lost without action to replace CAIR (17,000 fewer premature deaths avoided each year)

Tremendous uncertainty exists- the market for trading allowances collapsed following the decision (NOx trading stopped, SO2 allowance prices lost 70% of their value in a day)

States air quality compliance is in disarray- All who relied on CAIR must redo their clean air plans (SIPs) and will find it extremely difficult to make up the reductions attributable to CAIR

Utilities risk losing billions in investments in new pollution controls and purchases of allowances (one utility declared a $100 million dollar loss due to collapse of the allowance market)

With so much agreement, one would assume that quick legislative action is likely to address the problem. Not so fast- Don't forget that the CAIR rule came into existence because Congress could not agree on Clear Skies (a cap and trade legislative proposal). Those same rifts emerged during the Senate hearing.

How many P's? (which pollutants should a program cover- NOx, SO2, CO2 or Mercury)

How many States should be in? (28 versus a national program)

How steep and fast should reductions be? (there is disagreement even for the two pollutants everyone agrees should be covered- NOx and SO2)

This really is going to boil down to a game of chicken. On the one side (Democrats, downwind-Eastern states and environmental groups) on the other (Republicans, upwind-Midwest states and the utilities).

Do those advocating for an aggressive four pollutant bill really want to risk achieving no short term benefits in hopes of more aggressive legislation in the future? Are they willing to withstand the mess that will ensue in their States without at least a stop gap measure? Is this really the vehicle to adopt climate change legislation?

On the other side....do Utilities want to face this much uncertainty, especially heading into an election cycle? Are the Midwest states comfortable that CAIR reductions will be sufficient to meet tougher federal air quality standards? Are they willing to impose even more costly controls on businesses within their State if cap and trade is taken off the table?

It appears this may be the perfect storm that may actually result in something getting done. Lets hope so.

In my prior posts on CAIR, I analyzed the real world impacts of the Court's decision to vacate the program. In my final post on CAIR, I highlight some of the legal implications from the Court's decision on business and policy makers. This is not meant to be a legal brief for lawyers, but rather a quick summary of what matters most from the CAIR decision.

Deadlines and Dates- I had the pleasure of testifying in the U.S. Senate on the issue of ozone/soot deadlines and implementation of federal control programs. The Court made an astute conclusion in finding that U.S. EPA should have coordinated attainment deadlines for ozone and soot that are applicable to the States with the reductions required under the CAIR program. The Court held "EPA ignored its statutory mandate to promulgate CAIR consistent with provisions in Title I (of the Clean Air Act) mandating compliance deadlines in downwind state's." (page 25)

Coordination with State Pollution Control Plans- It is illogical to create federal air pollution reduction programs for power plants and vehicles that take 10-25 years to fully implement while requiring States meet federal air quality standards in 3-5 years. Depending on the State, power plants and vehicles make up roughly 30-50% of the ozone problem. You are handcuffing the State's by designing federal programs that won't assist their efforts to meet federal air quality standards until after applicable deadlines have past. Especially when much of the ozone and soot problem is regional in nature, not local. (see CAIR II: Short Term/Long Term Implications)

Cap and Trade "on the ropes"- For pollutants with both regional and local consequences it may be enormously challenging to create a valid trading program using the current authority in the Clean Air Act. Both CAIR and CAMR have been vacated by the Courts. Both represent the newest cap and trade pollution trading programs developed by U.S. EPA. Is this the end of cap and trade? Examine the following quotes from the Court's decision attacking the very foundations of a regional cap and trade program:

"Theoretically, sources in Alabama could purchase enough NOx and SO2 allowances to cover all their current emissions, resulting in no change in Alabama's contribution to Davidson County, North Carolina's non-attainment." (page 16)

"In Michigan we never passed on the lawfulness of the NOx SIP Call's trading program." (page 17) Seems like a less then subtle suggestion the Court may have thrown out the NOx SIP Call if similar challenges were made.

Economics of Compliance, Costs Cannot be the Driver-The Courts have rebuked EPA efforts to increase the relevance of the economic cost of pollution controls. The CAIR decision once again declares costs secondary to environmental consequence.

"EPA can't just pick a cost for a Region, and deem significant any emissions that sources can eliminate more cheaply." (pg. 37)

"EPA's interpretation cannot extend so far as to make one State's significant contribution depend on another state's cost of eliminating emissions." (page 39)

The Court strongly criticized EPA's fuel adjustment method of granting more allowances to states with coal burning power plants versus gas or oil. "The net result will be that states with mainly oil- and gas-fired EGUs (electric generating units) will subsidize reductions in states with mainly coal-fired EGUs...EPA's appraoch contravenes [the Clean Air Act]." (page 41)

In my previous post on the CAIR decision, I discussed the environmental and practical ramifications of the Court's decision vacating the program. While speaking at a large permitting seminar for manufacturer's, I had a chance to discuss the conclusions of my prior post with some State officials. While I was correct that the CAIR decision complicates the State pollution control plans for ozone and soot, the environmental consequences discussed in my prior post need to be adjusted to account for additional factors.

It is unclear how U.S. EPA will treat State air pollution control plans (SIPs) that rely on CAIR. However, in the short term, not all the CAIR controls will be scuttled or switched off. AEP and First Energy have entered into major settlements with U.S. EPA stemming from New Source Review (NSR) violations.

These settlements require installation and operation of billions of dollars in new air pollution controls on power plants in Ohio. The consent orders will act as a backstop now that CAIR is gone. Perhaps some additional state actions will be needed to put additional backstops in place where no federal decree covers the plant. In summary, it appears the Ohio may have the tools to deal with the short term issues presented by the absence of CAIR for sources within the State.

The longer term consequences still remain and by 2015 will be felt if Congress does not act by replacing CAIR quickly. CAIR was designed to drive a second wave of major reductions that will be very difficult to replace without some new federal program. This second wave of reductions are essential for state's trying to meet the tougher ozone standard (.075 ppm) and soot standard (fine particle- pm 2.5). If State's fail to meet either the ozone or soot standards, then existing businesses will likely be squeezed for additional air pollution reductions. Also, economic development is more difficult in areas not attaining federal air quality standards.

Another consequence of the absence of a CAIR like program will be a lot more litigation between the states. It won't just be North Carolina or the East Coast suing upwind sources. Even Ohio may be suing its neighbors like Indiana to try and force additional reductions.

Why? Ozone is truly a regional issue. Even City's that some may think have no one to blame for their air pollution, such as Cleveland, in fact receive a substantial contribution from upwind sources. Take a look at the figures to the left. They demonstrate how both ozone and P.M 2.5 are regional issues. The majority of pollution in these major cities is from regional not local sources.

All this points to the need for Congressional action to replace CAIR to avoid a serious and costly problem for the State's and businesses. Unfortunately, any action is very unlikely until we have a new President.

“CAIR will result in the largest pollution reductions and health benefits of any air rule in more than a decade. The action we are taking will require all 28 states to be good neighbors, helping states downwind by controlling airborne emissions at their source.”

--Steve Johnson, Acting EPA Adminstrator
3/10/2005

The Court included editorial comments trying to suggest the impact would be minimal. For instance, the Court points to two power plant pollution control programs (the NOx SIP call and Acid Rain Program) that will still be effective in reducing emissions even after CAIR is gone. The Court also suggests that State's could simply sue one another if more reductions are needed (using its Clean Air Act Section 126 authority). Litigation is hardly an effective pollution control strategy.

Bottom line, there is simply no way to minimize the impact of its decision or the ramifications for States and US EPA.

The map to the left is a good representation of the breadth of the CAIR program. Each dot represents advanced pollution controls on a power plant. (Click on the map to enlarge the view) This map shows US EPA's projections as to controls on power plants by 2010 after CAIR and CAMR (power plant mercury control program), both of which have been vacated by the Court. While some of the dots may remain due to the NOx SIP Call and Acid Rain Program, many will disappear or be on hold.

How many dots disappear? US EPA projected that CAIR would result in 116 more units having advanced air pollution controls in 2010. By 2020, the number was 287 more units.

While the decision certainly impacts efforts at cleaner air, it also makes a mess of state air pollution control plans (called State Implementation Plans- SIPs) that have been submitted for approval by US EPA. Most of the SIPs submitted rely on CAIR as a primary control method to achieve federal air quality standards for ozone and soot. The ruling brings tremendous uncertainty as to how these state plans will be reviewed.

To support CAIR, US EPA provided modeling to show air quality improvement that would result from reductions brought about by the program. State's relied upon this modeling as part of their air pollution control plans to achieve federal air quality standards.

What was the magnitude of air quality improvement that US EPA projected? The Agency showed that in 2005, 104 areas didn't meet ozone standards and 43 areas didn't meet pm 2.5 (soot) standards. By 2010, EPA projected the number of areas not meeting ozone and soot standards would be reduced to 14 and 20 respectively due in part to CAIR.

Now that the State's cannot rely on CAIR as a cornerstone of their air pollution control strategies, those reduction must come from somewhere. Without these massive reductions State's face missing deadlines to meet federal air quality standards. Missing the federal deadline can bring sanctions and more rigorous air pollution control requirements on businesses within the state.

US EPA has even adopted a tougher ozone standard which is currently being implemented. The State's face enormous challenges in meeting this new standard if there is no federal air pollution control program applicable to power plants. From reading the decision, it may be very difficult to craft a legal program using administrative authority. Congress may have to amend the Clean Air Act to give US EPA the authority, but since 1990 Congress has shown its reluctance to re-open the Clean Air Act.

Ohio better brace itself for even a larger jolt in prices attributable to CO2 regulation. Federal legislation such as S. 2191 (the Lieberman-Warner Bill), which would regulate carbon emissions, had a quick death a few weeks ago in the Senate. However, it is inevitable that federal legislation that establishes a carbon cap and trade program will pass soon after we have a new President (both McCain and Obama support the cap and trade approach).

With 87% of Ohio's power coming from coal, what impact would such a cap and trade program have on Ohio? Most understand there will be an impact, but I'm not sure most understand the magnitude. To illustrate the impact, I attached a chart from U.S. EPA's modeling of the impact of the Lieberman-Warner bill on electricity generation. The two charts project the amount of electricity generation from various sources (blue = coal, yellow = nuclear, green = other sources).

The chart to the left (click to enlarge image) is the status quo- no greenhouse gas regulation. It projects coal-fired power would continue to dominate generation in the US. The chart on the right shows what will happen if something close to Warner-Lieberman passes.

Not only does the amount of coal power shrink relative to nuclear and other sources like renewables, the composition of generation from coal dramatically shifts. The change from blue to red in the chart project the conversion of coal to carbon capture and sequestration (CCS). U.S. EPA projects that ALL coal plants will institute CCS by the year 2035. Why? Because the cost of emitting carbon will be so high that the economics will drive utilities to institute CCS.

Even U.S. EPA notes in its analysis that this projection is "optimistic." That certainly is an overstatement given the fact there are no successful CCS projects currently being implemented. So what does it mean if CCS is unrealistic in that time frame? It means huge cost increases for coal-fired utilities because the price of allowances under the cap and trade program will rise.

With fewer reductions there is a corresponding increase in the value of the C02 reduction credits used to offset emissions. Higher costs for C02 credits translates into larger compliance costs for coal-fired utilities. Those huge costs will be passed on to consumers in the form of electricity price increases.

Seems to me Ohio business and officials better start seriously considering the implications of federal regulation of CO2. I am not advocating against passage of greenhouse gas regulation. Ohio better start planning for a carbon constrained world and how electricity prices tied to coal generation may affect Ohio's competitiveness.